|About the Book|
Since 1980, the mutual fund industry has experienced a dramatic growth and households are the largest investor group in this industry. Also, mutual fund market has evolved into a very competitive one. However, most mutual fund investors appear toMoreSince 1980, the mutual fund industry has experienced a dramatic growth and households are the largest investor group in this industry. Also, mutual fund market has evolved into a very competitive one. However, most mutual fund investors appear to have little knowledge on financial details so that asymmetric information exists in this competitive market. This dissertation focuses on both the strategic asset allocation and fees in this mutual fund market and investigate its signaling effects under asymmetric information.-A SIGNALING APPROACH TO THE ADVERSE SELECTION PROBLEM studies how the signaling motive affects the mutual fund managers investment strategies and investigates how the adverse selection problem emerges under asymmetric information in a static model. In this model, managers investment return is private information and it could be either high or low. In order to shed light on the signaling effect, this dissertation presents both full information equilibrium and asymmetric information equilibrium and characterizes equilibrium investment strategies, payoffs. Managers strategic investment choices always reveal managers types so that any asymmetric information equilibrium is a signaling equilibrium. There exists a unique signaling equilibrium that survives the Intuitive Criterion. This signaling outcome is the one with the least amount of inefficient signaling and is obtained without any reputation concern. Low-return type chooses her full information investment strategy while high-return type adopts the more conservative one to signal her type. If the signaling equilibrium is the one where only one type of manager runs a mutual fund, then the manager should be of low-return type So, adverse selection problem emerges in a way that high-return type becomes much less likely to launch a mutual fund under asymmetric information while she would have chosen to do so under full information. These features produce consistent result with empirical research and bear some policy implications.-FEE COMPETITION AND ITS SIGNALING EFFECT develops a theoretical fee competition model under asymmetric information and characterizes fee determination in a competitive mutual fund market when fund managers differ in their investment efficiencies. This dissertation also investigates fund managers incentive to improve the investment efficiency in a duopoly market. Fees can vary even if mutual funds are identical in the presence of asymmetric information and every high-return type earns a strictly positive expected payoff. In addition, every high-return type tends to charge lower fees so that difference in fees is more likely to be attributed to the difference in performance as the market becomes more competitive. With respect to innovational incentive to improve efficiency, competition does not necessarily lower the management fee in a duopoly market if only one manager makes innovational exertion. In this equilibrium, a high single level of fee may prevail in the market. These results are consistent with empirical evidence and bear some policy implications.