Delegated Portfolio Management and Rational Prolonged Mispricing

  • Author(s): Eitan Goldman, Steve L. Slezak
  • Published: Feb 12, 2003
  • Pages: 283-311
  • DOI: 10.1111/1540-6261.00525

This paper examines how information becomes reflected in prices when investment decisions are delegated to fund managers whose tenure may be shorter than the time it takes for their private information to become public. We consider a sequence of managers, where each subsequent manager inherits the portfolio of their predecessor. We show that the inherited portfolio distorts the subsequent manager's incentive to trade on long‐term information. This allows erroneous past information to persist, causing mispricing similar to a bubble. We investigate the magnitude of the mispricing. In addition, we examine endogenous information quality. In some cases, information quality increases when the manager's expected tenure decreases.

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