Friday, August 7, 2015

Information Barriers in Global Markets Evidence from International Subcontracting Relationships

MASSA Massimo, SCHUMACHER David
Read the working paper
INSEAD Working paper 2015/56/FIN

We study the link between information barriers in global markets and the organizational form of asset management. Fund families outsource funds in which they are at an informational disadvantage to generate performance. Using a structural model of self-selection, we endogenize the outsourcing decision and estimate positive gains from outsourcing of around 9-14 bps per month despite the ex-post underperformance of outsourced funds vis-à-vis inhouse funds. The gains from outsourcing provide a novel proxy for the information barriers that segment global financial markets. The more segmented the underlying markets where the funds invest, the larger the gains from outsourcing.