This paper investigates the effects of managerial outsourcing on the incentives and performance of mutual funds. We document that mutual fund families outsource the management of a significant fraction of their funds to unaffiliated advisory firms. Funds managed externally significantly under-perform those ran internally. To establish the causality of this relationship, we instrument for whether a fund is outsourced and find similar estimates. We hypothesize that contractual externalities due to firm boundaries make it more difficult to extract performance from an outsourced relationship. We verify two auxiliary predictions of this hypothesis: compared to counterparts ran internally, an outsourced fund faces higher-powered incentives in that they are more likely to be closed due to poor performance or excessive risk-taking, and an outsourced fund takes less risk in response.
Chen, Joseph S.; Kubik, Jeffrey D.; and Hong, Harrison, "Outsourcing Mutual Fund Management: Firm Boundaries, Incentives and Performance" (2011). Economics Faculty Scholarship. 98.
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