Delegated Investment, Moral Hazard And Market Efficiency

As there are more and more investors in financial markets investing indirectly through mutual fund, pension fund and insurance fund, institutional investors have replaced the role of individual investors to become the dominant investors in financial markets. An accompanying change of the preponderance of delegated investing is that agent's (institutional investors or investment managers) objective function plays a more important role in asset pricing and market efficiency than individual investor's utility function. That is to say: the investment decisions made by investment managers are not only restricted by bounded rationality as referred in behavioral finance, but also influenced by moral hazard caused in delegated investments when investment managers pursue the maximization of their personal benefits. Moral hazard in delegated investments badly hurts principals directly as well as brings profound and complex influence to market efficiency. Therefore, it is both theoretically and practically meaningful to study this issue.Compared with individual investors, institutional investors behave more consistently with the assumption of"rational investor"in Efficient Market Hypothesis. However, does it mean the financial market will become more efficient since institutional investors become the mainstream in the market? The dissertation conducts a systematic study into this question. It constructs models to fully analyze the restriction mechanism and negative influence on improving the market information efficiency imposed by principal-agent structure between investors and investment managers and the moral hazard, institutional herding and limited arbitrage arising in delegated investments. Based on this analysis, this dissertation questions the three efficiency-reducing assumptions about the role of institutional investors on market efficiency.After discussing the influence of delegated investment on market efficiency and pricing efficiency, this dissertation shifts to focus on China's capital market. Since the institutional investors like securities investment fund develop so fast in China, what has changed to China's capital market operation, function and efficiency? This dissertationexamines the forms of moral hazard in securities investment fund and its influence on market efficiency, builds models to analyze the vicious circle of the mutual influence between short-termism of the fund investors and short-termism of the fund managers. The voting scandals in the process of stock structure reform made people to doubt about the proposition that institutional investors are capable of monitoring and reducing the private benefits of control held by controlling shareholders and corporate managers so as to enhance corporate governance and improve monitoring efficiency. Through model analysis, this dissertation presents the collusion and non-collusion strategies by investment manager and corporate manager and its respective influence on private benefits of control of corporate. And the dissertation proposes some measures to this problem. While the moral hazard in delegated investments brings negative influence on the information efficiency and function efficiency of the market. In order to maintain the orderly operation of the financial market, we can deal with the agency problem through contract design and fund governance. The last part of this dissertation discuss about how to improve fund governance mechanism and fund management fees designing so as to reduce the negative influence of moral hazard brought by investment fund on the financial market efficiency.