On the Incentives for Money Managers: A Signalling Approach

Money managers select weights of managed portfolios to enhance their reputation in the spot market for their services, inevitably using their actions to signal their quality. We develop a two-asset signalling model of money managers. A unique screening equilibrium and (under certain parameter configurations) a host of pooling equilibria survive the Cho-Kreps Intuitive Criterion. In all the equilibria managers behave more aggressively than they would in the absence of the signalling motive, exaggerating their position in the risky asset.