When Should Firms Share Credit with Employees? Evidence from Anonymously Managed Mutual Funds
Massimo Massa, INSEAD
Jonathan Reuter, University of Oregon
Eric Zitzewitz, Dartmouth College

We study the economics of sharing credit with employees, using the U.S. mutual fund industry as our testing ground. Between 1993 and 2004, the share of funds that disclosed manager names to their investors fell significantly. We hypothesize that the choice between named and anonymous management reflects a tradeoff between the marketing and incentive benefits of naming managers and the costs associated with increased ex-post bargaining power. Consistent with this tradeoff, we find that funds with named managers receive more positive media mentions, have greater inflows, and suffer less return diversion, but that departures of named managers reduce inflows, especially for funds with strong past performance. To the extent that the hedge fund boom differentially increased outside opportunities for successful named managers, we predict that it should have increased the costs associated with naming managers and led to more anonymous management. Indeed, we find that the shift towards anonymous management is greater in those asset classes and geographical areas with more hedge fund activity.

Mutual funds that name their managers allow those managers to acquire reputations in the market. When those reputations are good, the managers become more valuable. Funds that employ managers with good reputation may attract flows, but they also may have to pay their managers more or risk losing them, especially to hedge funds. The potential for obtaining a valuable reputation thus also provides strong incentives for the managers to work harder. The results produced in this project show that the decision to name the managers has significant implications for mutual fund management companies.