Governance and shareholder value in delegated portfolio management : the case of closed-end funds

Based on the records of 1183 individual fund managers from 1985 to 2010, we investigate the compensation and discipline mechanisms in the closed-end fund industry and their implications for manager performance and fund premium. We find that managers generating high surplus, as proxied by fund premium, capture rents on their skills by expansions of assets under management and increases in management fees; however, managers with a high discount are not penalized accordingly. Managers with poor NAV performance suffer from asset contractions, but such discipline is insignificant for managers with long tenure. Consistent with manager entrenchment and decreasing returns to scale, NAV performance and premium decline with manager tenure and the size of assets under management. Finally, in support of the notion that adjustments of assets under management and management fees in response to extreme performance break the premium-performance relation, we find that the fund premium responds positively only to the medium-range NAV performance.