Does Firm Organization Matter? Evidence from Centralized and Decentralized Mutual Funds

Abstract

We examine the impact of centralization of investment decisions by a fund's family on its funds' performance and show that funds from decentralized families have higher performance than their centralized counterparts. We exploit a quasi-experiment involving failed mergers to generate exogenous variation in acquisition outcomes of target funds. A difference-in-differences estimation reveals that, relative to failed funds, those acquired in a merger by centralized (decentralized) fund family produce lower (higher) performance. These differences in performance are driven by more discretion in managerial decision making in decentralized fund families. We confirm these findings by tracing the response of centralized and decentralized funds to exogenous changes in their information environment. Though funds in centralized families have lower performance than their decentralized counterparts, we show that these families allow for better coordination in trading and brokerage decisions and better diversification across funds in the family.