Abstract
How does delegation of equity ownership reshape the link between risk sharing and monitoring? We show that delegation contracts optimally separate the two by independently calibrating managerial trading and monitoring incentives. This is achieved despite the inability to commit to, or contract on, these activities directly. When the contract maximizes client surplus, it maps onto activist hedge funds; when it maximizes managers’ profits, it maps onto mutual funds that provide risk sharing but no monitoring. Both deliver less monitoring and risk sharing than proprietary blockholding, and block size poorly predicts monitoring. Funds that offer monitoring must also offer risk sharing.
© Amil Dasgupta, Richmond Mathews, 2022
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