Abstract
We develop a model of trading by an informed fund manager compensated on the basis of her fund's Net Asset Value (NAV) and show that she has an incentive to pump her portfolio by buying securities already held by her fund. Such portfolio pumping leads to excessive trading and diminished long-term fund performance. Portfolio pumping also introduces an upward bias in measured NAVs and contributes to the closed-end fund discount. Despite such costs, it may be optimal to base fund manager compensation on NAV in order to incentivize her to trade more aggressively.
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