Working Paper 09-11
Departamento de Economía
Economic Series (06)
Universidad Carlos III de Madrid
March 2009
Calle Madrid, 126
28903 Getafe (Spain)
Fax (34) 916249875
Career Concerns and Investment Maturity in Mutual
Funds∗
Yolanda Portilla†
This draft: March 6, 2009
Abstract
An important puzzle in financial economics is why fund managers invest in short-maturity assets
when they could obtain larger profits in assets with longer maturity. This work provides an
explanation to this fact based on labor contracts signed between institutional investors and fund
managers. Using a career concern setup, we examine how the optimal contract design, in the
presence of both explicit and implicit incentives, affects the fund managers decisions on
investment horizons. A numerical analysis characterizes situations in which young (old)
managers prefer short-maturity (long-maturity) positions. However, when including multitask
analysis, we find that career concerned managers are bolder and also prefer assets with long
maturity.
Key words. Contract theory; career concerns; financial equilibrium; investment maturity
Journal of Economic Literature. Classification Number: G29, J44, J24
.
∗I am deeply grateful to Luis Úbeda for his comments and guidance. This work has also benefited from
comments by Juan Pedro Gómez, Francisco Marhuenda, Marco Trombetta, and the participants in the 6th
Meeting on Social Security and Complementary Pensions Systems: Pension Fund Asset Management
(Lisboa, 2007), the 34th Conference of European Association for Research on Industrial Economics
(Valencia, 2007), the Spanish Finance Association Meeting (Palma de Mallorca, 2007), the Spanish
Economic Association Meeting (Granada, 2007), and the EEA-ESEM (Milan, 2008).
†
Department of Economics, Universidad Carlos III de Madrid, C. Madrid 126, Getafe, 28903, Madrid,
Spain. E-mail: yportill@eco.uc3m.es, Tel: +34 (41) 2 20 31 17, Fax: +34