2fund ownership data have been unavailable prior to 2005.
Since mutual fund managersare not required to own fund shares, many researchers have assumed that their investmentis small. Jin (2006), for instance, assumes that, since mutual funds managers generallyare not required to own shares in their fund, they have no personal reason to care aboutfund tax consequences. This statement implies that the lack of an explicit requirement toown fund shares is equivalent to a manager not making a material investment in his fund.This assumption, though common, is contrary to the findings in this study. Of the 237mutual fund portfolios in my sample, 22 percent have a manager who has personallyinvested over $1,000,000 in his fund.In addition to being a vehicle to extend the agency literature, mutual funds areimportant in their own right. Mutual funds are playing an increasingly large role indomestic equity markets, as documented by the Investment Company Institute (ICI,2005). The ICI reports that the mutual fund industry managed $8.1 trillion and heldapproximately 22% of the outstanding stock of US companies in 2004. At the same time,regulators and fund investors are increasing their focus on the trading behavior of fundmanagers after the revelation of several recent trading abuses. This increased scrutinyculminated in the SEC’s new regulation requiring mutual funds to disclose managerialownership levels, compensation structure, and conflicts of interest.
Tufano and Sevick (1997), Qian (2005), and Meschke (2005) study agency problems with respect to fund boards of directors.
US Securities & Exchange Commission, 2004. Final Rule: Disclosure Regarding Portfolio Managers of Registered Management Investment Companies. 17 Code of Federal Regulation Parts 239, 249, 270, 274.US Government Printing Office, Washington, DC.
Kunal Kapoor, Director of Fund Analysis at Morningstar, Inc., places mutual fund managers in twodistinct categories: money managers and fund shareholders. This categorization reflects the opinion thatfund managers who are personally invested in the fund likely possess more conviction, taking more care inexecuting appropriate trades, than money managers who simply perform investing services in exchange for compensation.