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Does skin in the game matter? Director incentives and governance in the mutual fund industry

Author: Cremers, Martijn ; Driessen, Joost ; Maenhout, Pascal ; Weinbaum, DavidINSEAD Area: FinanceIn: Journal of Financial and Quantitative Analysis, vol. 44, no. 6, December 2009 Language: EnglishDescription: p. 1345-1373.Type of document: INSEAD ArticleNote: Please ask us for this itemAbstract: We use a unique database on ownership stakes of equity mutual fund directors to analyze whether the directors' incentive structure is related to fund performance. Ownership of both independent and nonindependent directors plays an economically and statistically significant role. Funds in which directors have low ownership, or "skin in the game," significantly underperform.We posit two economic mechanisms to explain this relation. First, lack of ownership could indicate a director’s lack of alignment with fund shareholder interests. Second, directors may have superior private information on future performance. We find evidence in support of the first and against the second mechanism
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We use a unique database on ownership stakes of equity mutual fund directors to analyze whether the directors' incentive structure is related to fund performance. Ownership of both independent and nonindependent directors plays an economically and statistically significant role. Funds in which directors have low ownership, or "skin in the game," significantly underperform.We posit two economic mechanisms to explain this relation. First, lack of ownership could indicate a director’s lack of alignment with fund shareholder interests. Second, directors may have superior private information on future performance. We find evidence in support of the first and against the second mechanism

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