Reputation Concerns and Slow-Moving Capital

Abstract

Our paper shows that fund managers' reputation concerns induce a preference over the skewness of strategy returns. This preference is non-monotonic in the manager's reputation level: While managers with average reputations prefer negatively skewed strategies, those with very high or very low reputations prefer the opposite. Our model also explains why only negatively skewed strategies tend to suffer from slow-moving capital: A subtle but natural consequence of adopting negatively skewed strategies is that after poor performance, managers' reputations recover slowly. In the meantime, they are unable to raise capital, leaving attractive opportunities unexploited.