Two-sided career concern and financial equilibrium

This brief paper constructs a model of delegated portfolio management in which two agency relationships are characterized. First, a delegation process from investors to fund companies, and second, a delegation from fund companies to fund managers. Career concerns of both agents lead to a churning equilibrium in which uninformed managers trade noisily, and uninformed fund companies are willing to hire these uninformed managers. This equilibrium delivers non-fully informative prices and a positive and high trading volume. Our model then strengths previous explanations to the trade puzzle, predicting an increasing trade activity as long as institutional investors with intense delegation play an increasing role in financial markets.