The distorting effect of the prudent-man laws on institutional equity investments

The distorting effect of the prudent-man laws on institutional equity investments I examine the effect of prudent-man laws on the behavior of institutional investors. Variation in exposure to legal liability across types of investment managers allows me to disentangle the effect of the prudent-man laws from other potential influences on manager behavior. Bank managers significantly tilt the composition of their portfolios toward stocks that are viewed by the courts as prudent, while mutual fund managers choose not. I show that differences in the direction that bank and mutual fund managers choose to tilt may explain their portfolio performance differences over time. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economics Elsevier

The distorting effect of the prudent-man laws on institutional equity investments

Journal of Financial Economics, Volume 40 (1) – Jan 1, 1996

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Publisher
Elsevier
Copyright
Copyright © 1996 Elsevier Ltd
ISSN
0304-405x
D.O.I.
10.1016/0304-405X(95)00841-2
Publisher site
See Article on Publisher Site

Abstract

I examine the effect of prudent-man laws on the behavior of institutional investors. Variation in exposure to legal liability across types of investment managers allows me to disentangle the effect of the prudent-man laws from other potential influences on manager behavior. Bank managers significantly tilt the composition of their portfolios toward stocks that are viewed by the courts as prudent, while mutual fund managers choose not. I show that differences in the direction that bank and mutual fund managers choose to tilt may explain their portfolio performance differences over time.

Journal

Journal of Financial EconomicsElsevier

Published: Jan 1, 1996

References

  • The cross-section of expected stock returns
    Fama, Eugene; French, Kenneth

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