Open Access JMF How Do Principal-Agent Effects in Delegated Portfolio Management Affect Asset Prices?

Copyright © 2013 Petter N. Kolm. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. We investigate the impact of delegated portfolio management on asset prices in a noisy rational equilibrium model. As-set prices in our model are linear in fund managers ’ private signals and in realized supply shocks. We show that equilib-rium expected returns 1) decrease as the proportion of fund managers increase in the economy; 2) decrease as the preci-sion of fund managers ’ signals increase ’ and 3) increase as the fund managers ’ contingent fees increase