Cross-Subsidization in Institutional Asset Management Firms

We study cross-subsidization among U.S. equity products managed by institutional asset management firms. We find returns-based evidence consistent with both cross-subsidization receipt by strong recent performers that are relatively small in their firms and provision by products that are relatively...

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Bibliographic Details
Published in:The Review of financial studies 2018-02, Vol.31 (2), p.638-677
Main Authors: Chaudhuri, Ranadeb, Ivković, Zoran, Trzcinka, Charles
Format: Article
Language:English
Subjects:
Asset management
Assets
Companies
Experts
Financial instruments
Investors
Ratings & rankings
Studies
Tax exempt
Taxation
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Summary:We study cross-subsidization among U.S. equity products managed by institutional asset management firms. We find returns-based evidence consistent with both cross-subsidization receipt by strong recent performers that are relatively small in their firms and provision by products that are relatively large in their firms. Tax-exempt investors and taxable investors do not have a clear ranking by expertise, but tax-exempt investors’ agency issues are more complex. Accordingly, taxable clients have more flow-performance nonlinearity and receive more (and provide less) cross-subsidization. Taxable investor flows appear more discerning, but only under the circumstances conducive to cross-subsidization, suggesting that “more discerning” likely means “more cross-subsidized.”
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhx075