Abstract
We test the corporate theory of managerial herding based on reputation and career concerns (Scharfstein and Stein, 1990) by focusing on the mutual fund industry. We investigate the trade-off between reputation and compensation and study how incentives in the advisory contract affect managerial herding. We consider two types of herding: category herding - the choice of operating in a category in which it is easier to preserve reputation, and stock herding - the choice of a trading strategy similar to the ones of the competitors. We show that a high incentive contract induces entry in categories in which an extreme performance realization is more likely and the adoption of trading strategies different from the ones being followed by other funds. Family affiliation reduces the tendency to herd and, therefore, reduces the need for high incentive contracts.
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