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Empirical Tests of a Principal-Agent Model of the Investor-Investment Advisor Relationship

Published online by Cambridge University Press:  06 April 2009

Joseph H. Golec
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Abstract

This paper develops a specialized principal-agent model of the investor-investment advisor relationship and embeds the standard advisory compensation schedule in the model. Advisors are endowed with information-gathering abilities and investors are endowed with funds. Information-gathering services are traded indirectly through the investor's receipt of portfolio returns net of advisory fees. Model results show that the parameters of the compensation schedule are both a function of the idiosyncracies of an advisor's information services and the degree of risk sharing between the advisor and investor. Several predictions of the model are supported using data on mutual fund advisors. Unsupported predictions may be due to self-selection of advisors by risk tolerance.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 1 , March 1992 , pp. 81 - 95
Copyright
Copyright © School of Business Administration, University of Washington 1992

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