DP12664 Efficiently Inefficient Markets for Assets and Asset Management

Author(s): Nicolae Bogdan Garleanu, Lasse Heje Pedersen
Publication Date: January 2018
Keyword(s): asset management, Asset Pricing, efficiency, Information, investment, liquidity, search
JEL(s): G1, G11, G12, G14, G2, G23, G24
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12664

We consider a model where investors can invest directly or search for an asset manager, information about assets is costly, and managers charge an endogenous fee. The efficiency of asset prices is linked to the efficiency of the asset management market: if investors can find managers more easily, more money is allocated to active management, fees are lower, and asset prices are more efficient. Informed managers outperform after fees, uninformed managers underperform after fees, and the net performance of the average manager depends on the number of "noise allocators." Small investors should be passive, but large and sophisticated investors benefit from searching for informed active managers since their search cost is low relative to capital. Hence, managers with larger and more sophisticated investors are expected to outperform.