This paper considers the problem faced by long-term investors who have to delegate the management of their money to professional fund managers. Investors can earn profits if fund managers collect long-term information. We investigate to what extent the delegation of fund management prevents long-term information acquisition, inducing short-termism in financial markets. We also study the design of long-term fund managers’ compensation contracts. Under moral hazard, fund managers’ compensation optimally depends on both short-term and longterm fund performance. Short-term performance is determined by price efficiency, and thus by subsequent fund managers’ information acquisition decisions. These managers are less likely to be active on the market if information has already been acquired initially, giving rise to a feedback effect. The consequences are twofold: First, short-termism emerges. Second, short-term compensation for fund managers depends in a non-monotonic way on long-term information precision. We derive predictions regarding fund managers’ contracts and financial markets efficiency.
TSE Working Paper, n° 09-042, 2009, révision octobre 2015