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Review of Financial Studies

Career Risk and Market Discipline in Asset Management

Journal Article
Ellul, Andrew, Marco Pagano and Annalisa Scognamiglio (2020). “Career Risk and Market Discipline in Asset Management”. Review of Financial Studies 33(2), 783–828.

Andrew Ellul, Marco Pagano, Annalisa Scognamiglio

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 coupled with a significant loss in imputed compensation. Scarring effects are absent when liquidations are preceded by normal relative performance or involve midlevel employees. Seen through the lens of a model with moral hazard and adverse selection, these scarring effects can be ascribed to a drop in asset managers’ reputation. The findings suggest that performance-induced liquidations supplement compensation-based incentives.