The Cross‐Section of Managerial Ability,Incentives, and Risk Preferences

I estimate a dynamic investment model for mutual managers to study the cross‐sectional distribution of ability, incentives, and risk preferences. The manager's compensation depends on the size of the fund, which fluctuates due to fund returns and due to fund flows that respond to the fund's relative performance. The model provides an economic interpretation of time‐varying coefficients in performance regressions in terms of the structural parameters. I document that the estimates of fund alphas are precise and virtually unbiased. I find substantial heterogeneity in ability, risk preferences, and pay‐for‐performance sensitivities that relates to observable fund characteristics.     

The Impact of Volatility on Firms Holding Growth Options

“Abuses of real option valuation were partly behind the ramping and subsequent deramping of the 2000 internet techno bubble. No one ever got to eat the free lunch these real option 'theorists' promised. No one ever will; no one ever could.” (Mayor 2001, 53) Growth options contribute to over 95% of the market value of Internet stocks such as Amazon.com, America Online, and eBay. Finance theory often promotes market volatility as being desirable for investors holding financial options. Is volatility also desirable for firms holding growth options? While many argue that it is, this paper presents a simple example illustrating that increasing volatility can destroy growth option value, especially for firms holding “quality” growth options.