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Performance‐Based Fee Contract And Risk‐Taking Strategy In Asset Management Tournament

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  • Jiliang Sheng
  • Xiaoting Wang
  • Jun Yang
  • Miao Li

Abstract

This paper investigates how performance‐based fee (PBF) contracts affect strategic risk‐taking behaviours of fund managers in an asset management tournament. In the perfect equilibrium, managers with better mid‐year performance will hold the risky asset with a higher probability in the remaining of the year, compared to managers with poorer mid‐year performance. If the volume of the cash flow into the winner fund is contingent on its level of success, the winning fund will take a more aggressive approach. When the PBF contract pays more heed to relative performance against the benchmark, managers are more likely to adopt aggressive strategies.

Suggested Citation

  • Jiliang Sheng & Xiaoting Wang & Jun Yang & Miao Li, 2019. "Performance‐Based Fee Contract And Risk‐Taking Strategy In Asset Management Tournament," Bulletin of Economic Research, Wiley Blackwell, vol. 71(3), pages 388-403, July.
    • Handle: RePEc:bla:buecrs:v:71:y:2019:i:3:p:388-403
    DOI: 10.1111/boer.12185
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