DP10447 Short-Sale Constraints and the Pricing of Managerial Skills

Author(s): Si Cheng, Massimo Massa, Hong Zhang
Publication Date: March 2015
Keyword(s): Managerial skills, mutual funds, short-sale constraint.
JEL(s): G1, G2, J0
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10447

We investigate the impact of the absence of short selling on the pricing of managerial skills in the mutual fund industry. In the presence of divergent opinions regarding managerial skills, fund managers can strategically use fees to attract only the most optimistic capital. The recognition of this fee strategy helps explain a set of stylized observations and puzzles in the mutual fund industry, including the underperformance of active funds, the existence of flow convexity, and the negative correlation between gross-of-fee α and fees.