When PhDs Manage Money

What value does the PhD have outside the academic setting?
When PhDs Manage Money

According to a recent study by four professors, when PhD holders are in key roles at money management firms, they outperform non-PhD-holders across all measures.

“Hiring employees to maximize assets under management is of first-order importance for money management companies,” says lead author Charles Trzcinka, professor of finance at Indiana University’s Kelley School of Business in Bloomington. He conducted the research along with Ranadeb Chaudhuri of the Kelley School, Zoran Ivkovich of Michigan State University in East Lansing, and Joshua Matthew Pollet of the University of Illinois at Urbana-Champaign.

The four co-authors analyzed 14 years of quarterly data from 822 money management firms that manage 2,590 domestic equity products with US$4.2 trillion in assets; of these firms, 134 hired 531 PhDs and managed 817 products with $2.2 trillion in assets. The researchers found that the domestic equity investment products managed by PhDs performed better than those products managed by non-PhDs when matched by objective, size and past performance for one-year returns, Sharpe ratios, alphas, information ratios, and MPPM, the manipulation- proof performance measure. Further, investment flows to PhD-managed products substantially exceeded the flows to their non-PhD counterparts. There is even a performance gap among PhDs: Those who published in top outlets in economics and finance outperformed the PhDs who did not.

The paper provides reason for money management firms to seek out employees with PhDs for some roles and demonstrates opportunities for PhDs outside academia. Says Trzcinka, “While only a small part of the larger debate, our paper provides evidence toward the value of attaining a higher degree.”

“What a Difference a Ph.D. Makes: More Than Three Little Letters” is available at ssrn.com/abstract=2344938.