What are the equilibrium features of a Þnancial market where a sizeable proportion of traders face reputational concerns? This question is central to our understanding of Þnancial markets that are increasingly dominated by institutional investors. We construct a model of delegated portfolio management that captures key features of the US mutual fund industry and embed it in an asset pricing framework. We thus provide a formal model of Þnancial equilibrium with career concerned agents. Fund managers differ in their ability to understand market fundamentals, and in every period investors choose a fund. In equilibrium, the presence of career concerns induces uninformed fund managers to churn, i.e. to engage in trading even when they face a negative expected return. As churning plays the role of noise trading, the asset market displays non-fully informative prices and positive (and high) trading volume. The equilibrium relationship between fund return and net fund ßows displays a skewed shape that is consistent with stylized facts. The robustness of our core results is probed from several angles.
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