3.04. Career Concerns, Long-Term Contracts and Short-Maturity Investments in Mutual Funds

Autores: F. Morales Parada, P. Arias Muñoz, R. Hollander Sanhueza, C. Muñoz 

Abstract.

An important puzzle in Önancial economics is why fundís managers invest in short-maturity assets when they could obtain larger proÖts in assets with longer maturity. This work provides an explanation for this fact based on the labor contracts signed between institutional investors and fundís managers.

Using the career concerns setup, we examine how the optimal contract design, in the presence of both explicit and implicit incentives, a§ects the fund managerís decisions on investment horizons. Conditions under which young (old) managers prefer short-maturity (long-maturity) positions are stated and the robustness of these results to some extensions is evaluated.

Keywords: Contract Theory, Career Concerns, Financial Markets.
JEL classification: G29, J440, J240.