Author(s):	Andrew Ellul, Marco Pagano, Annalisa Scognamiglio
Publication Date:	April 2018
Keyword(s):	asset managers, careers, Hedge Funds, market discipline, scarring effects
JEL(s):	G20, G23, J24, J62, J63
Programme Areas:	Labour Economics, Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=12851

We establish that the labor market helps discipline asset managers via the impact of fund liquidations on their careers. Using hand-collected data on 1,948 professionals, we find that top managers working for funds liquidated after persistently poor relative performance suffer demotion entailing a yearly average compensation loss of $664,000. Scarring effects are absent when liquidations are preceded by normal performance or involve mid-level employees. Based on a model with moral hazard and adverse selection, we find that these results can be ascribed to reputation loss rather than bad luck. The findings suggest that performance-induced liquidations supplement compensation-based incentives.