The Effects of the Organizational Structure on Asset Management

We study how the strategies and performance of an asset management company are affected by its internal organizational structure. Relying on Stein’s (2002) theory of organizations, we argue that a more hierarchical structure reduces the incentives to collect “soft” information and to engage in proximity investment. This should lower portfolio concentration, increase managerial herding and reduce performance. We use information on the organizational structure of all the US mutual funds and insurance-managed funds investing in US corporate bonds. We show that more hierarchical structures invest less in firms located close to them and deliver lower performance. An additional layer in the hierarchical structure reduces the average performance by 24 basis points per month. At the same time, more hierarchical structures tend to herd more and to hold less concentrated portfolios. We also find that changes in fund structure quickly find their way into the behavior of fund managers. Overall, the organizational structure affects performance slightly more for mutual funds than insurance-managed funds, while it impacts proximity investment, herding and portfolio concentration more for insurance-managed funds than mutual funds. JEL classification: G23, G30, G32