Fund Manager Duality: Impact on Performance and Investment Behavior

Agency conflicts can arise when a fund manager also chairs the board of the fund. We examine the consequences of this fund manager duality using a broad sample of single managed US equity funds. We find that duality managers significantly underperform non-duality managers. This underperformance results from duality funds in the bottom performance quintile. This suggests that duality managers can avoid being laid off despite their bad performance. Consistent with this lower risk of dismissal, duality managers follow more risky investment strategies. They choose more unsystematic risk and follow more extreme investment styles which lead to more extreme performance outcomes. Only about one fifth of the nonduality managers invest as extremely as the average duality manager. However, all these consequences of manager duality can be cured by hiring independent directors. JEL classification: G23, G34 EFM classification: 110, 150, 370, 380