We provide novel evidence on the role of ambiguity aversion in determining the response of mutual fund investors to fund performance. Our analysis is motivated by theoretical models of decision making by ambiguity-averse investors. A key implication of the models is that when investors face...

This study explores optimal portfolio management contracts in the context of ‘opaque' portfolios invested in illiquid or privately held assets. We identify shortcomings of linear contracts in this context and demonstrate that the second-best optimal contract features a convex component. The...

We study the impact of the tournament-like competition in the mutual fund industry by examining the Active Share choices of funds. Funds with relatively poor performance by the end of the third quarter in a calendar year tend to increase their Active Share during the last quarter. The increase...

This paper analyzes optimal non-linear portfolio management contracts. We consider a setting where the investor faces moral hazard with respect to the effort and risk choices of the portfolio manager. The manager's employment contract promises her: (a) a fixed payment, (b) a proportional...

Investor concerns surrounding the COVID-19 pandemic triggered large fund outflows from prime institutional money market funds (PIFs) during March 2020. This episode highlights the continued susceptibility of such funds to financial market stress. In this paper we present novel evidence on the...

We model the employee incentive problem jointly with a firm's exit decision. Our model predicts that firms in industries where human capital is important are more likely to go public and use high-powered stock-based compensation. We also show that the higher the management quality, the more...

Implicit guarantees provided by financial intermediaries are important in China. We argue theoretically that project screening by financial intermediaries, accompanied by their implicit guarantees to investors, can be the second-best arrangement. It can also mitigate capital misallocation that...

This paper analyzes a fund manager's portfolio optimization problem when compensated by either a high-water marks (HWM) contract or a recurring option contract with a fixed benchmark rate. In a model with an indefinite number of periods, the compensations are paid out annually, while the...

We examine whether climate-change risk affects firms' cost of capital when firms canadapt to the risk. We find firms' cost of long-term loans increases with sea level rise(SLR) risk, but this effect mainly holds among firms with high adjustment costs to therisk, i.e., firms for whom it is hard...

The acceleration of U.S. productivity growth in late 1990s suggests a significant advance in technological innovations, making the perceived probability of entering a quot;new economyquot; ever increasing. Based on macroeconomic data, we identify a Bayesian investor's belief evolution when...