Discussion paper

DP12851 Career Risk and Market Discipline in Asset Management

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.


Ellul, A, M Pagano and A Scognamiglio (2018), ‘DP12851 Career Risk and Market Discipline in Asset Management‘, CEPR Discussion Paper No. 12851. CEPR Press, Paris & London. https://cepr.org/publications/dp12851