This paper investigates the extent to which the delegation of funds management prevents long-term information acquisition, inducing short-termism in financial markets. The authors, Catherine Casamatta and Sebastien Pouget also study the design of long-term fund managers’ compensation contracts.
Under moral hazard, fund managers’ compensation optimally depends on both short-term and long-term fund performance.
Short-term performance is determined by price efficiency, and thus by subsequent fund managers’ information acquisition decisions.
These managers are less likely to be active on the market if information has already been acquired initially, giving rise to a feedback effect.
The authors say the consequences are twofold: First, short-termism emerges. Second, short-term compensation for fund managers depends in a non-monotonic way on long-term information precision. We derive predictions regarding fund managers’ contracts and financial markets efficiency.
The paper can be accessed below: