Evaluating the Impact of Portfolio Mandates

Internal seminar for researchers

Abstract: This paper evaluates the effectiveness of portfolio mandates on capital allocation. We argue that a firm’s cost of capital is not a good measure of mandate effectiveness. Instead, evaluating the real impact of mandates requires examining their effect on sectoral capital allocation. Contrary to the prediction of endowment-based models, we show that mandates may have a negligible impact on the cost of capital and yet significantly influence the allocation of capital across sectors. Using a production-based model calibrated to match key asset-pricing and macroeconomic moments, we estimate that a significant portion of the mandate remains effective in shaping equilibrium capital allocation, even when there is little disparity in the cost of capital across sectors.