Delegated portfolio management with career concerns

The paper proposes a model of delegated portfolio management in which career concerns lead to unprofitable trade by uninformed managers (i.e. churning). We find that churning does not necessarily reduce the return that a representative investor expects ex-ante from delegating trade to a manager. As uninformed managers churn, the level of noise in the market increases and informed managers generate higher returns than in the absence of churning. When fundamental volatility is relatively low, uninformed managers trade less aggressively and the high returns expected from informed managers more than compensate the losses expected from uninformed managers. While career concerns generally lead to an increase in trade volume, the pattern of churning that we highlight also implies that both the volume of uninformed trade and the aggregate volume of trade are positively related to the level of asset riskiness. (C) 2012 Elsevier B.V. All rights reserved.