Stefano Pegoraro

Previous literature documents a convex flow-performance relationship in equity mutual funds. I show this pattern is consistent with a dynamic contracting model with learning about the fund manager's skill. The model provides novel empirical predictions. First, flows become more sensitive to current performance after a history of good past performance. Second, the history-dependence of the flow-performance relationship is weaker for managers with longer tenure. The model also explains common compensation practices in the industry, such as convex pay-for-performance schemes and deferred compensation. Methodologically, I provide a duality-based strategy to overcome the technical challenges of continuous-time contracting models with state variables.

After the announcement of the European Central Bank’s corporate quantitative easing program, non-financial corporations timed the bond market by shifting their issuance toward bonds eligible for the program. However, issuers of eligible bonds did not increase total issuance compared to other issuers; nor did they experience different economic outcomes. Instead, the announcement produced substantial spillover effects on risk premia. Credit risk premia declined, both in the corporate bond market and in the default swap market, whereas the valuation of eligible bonds did not change relative to comparable ineligible bonds. Firms took advantage of reduced risk premia by issuing riskier bonds.

I develop a continuous-time game between a population of investors and an intermediary whose type is private information and whose portfolio allocation is neither observable nor contractible. I define and characterize a sequential equilibrium of the game and solve for a Markovian equilibrium where investors’ posterior beliefs are the key state variable. In my model, demand for riskless assets undergoes dramatic changes that resemble the episodes of flight to safety observed during financial crises. I show that a risk-neutral intermediary chooses a portfolio that minimizes risk when beliefs are near the threshold below which the intermediary is terminated.