Abstract
This paper examines the effect of money managers’ status on the subsequent money flows, performance, compensation, and risk-taking behavior of mutual funds. We take advantage of shifts in fund managers’ status following the introduction of Morningstar’s Fund Manager of the Year (FMOY) award. While our results show that investors respond positively to award-winning fund managers, we find evidence that award-winning managers generate negative risk-adjusted performance after receiving the award. Our further test shows that such underperformance is attributed to new money flows (i.e. diseconomies of scale). We also find award-winning managers are able to use their increased power to extract higher compensation. Finally, award-winning managers do not take on increased risks as implied by overconfidence. Our results suggest that the ex-post value consequences of superstar status for investors are negative.
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