Managerial Rents vs. Shareholder Value in Delegated Portfolio Management: The Case of Closed-End Funds

Abstract

Based on the records of 1183 individual fund managers from 1985 to 2010, we investigate manager compensation and discipline in the closed-end fund industry and their implications for manager performance and fund discounts. We nd that managers generating high shareholder surplus, as proxied by fund premium, capture rents on their skills by expansions of assets under management and increases in management fees; however, managers with a high discount are not penalized accordingly. Managers with poor NAV performance suer from asset contractions, but such discipline is insignicant for managers with long tenure. In support of the hypotheses of manager entrenchment and decreasing returns to scale, NAV performance and premium decline with manager tenure and the size of assets under management. Finally, consistent with the conjecture that adjustments of assets under management and management fees in response to extreme performance break the premium-performance relation, the fund premium responds positively only to the NAV performance in the medium range.