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Portfolio pumping and fund performance ranking: A performance-based compensation contract perspective

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  • Li, Xiangwen
  • Wu, Wenfeng

Abstract

We collect compensation policy data from 60 Chinese mutual fund companies, which cover 88% of the assets managed by all active stock and stock-oriented hybrid mutual funds in China. Using the collected data, we investigate portfolio pumping from a performance-based perspective. We find that portfolio pumping is stronger for funds ranking around critical points of performance distribution (i.e., the top one-tenth, one-fourth, one third, and half cutoffs). This finding is mainly driven by funds from companies that set these critical points to grade fund managers’ bonus levels. Our findings provide evidence of portfolio pumping motivated by performance ranking instead of the flow-performance relationship documented in prior studies.

Suggested Citation

  • Li, Xiangwen & Wu, Wenfeng, 2019. "Portfolio pumping and fund performance ranking: A performance-based compensation contract perspective," Journal of Banking & Finance, Elsevier, vol. 105(C), pages 94-106.
    • Handle: RePEc:eee:jbfina:v:105:y:2019:i:c:p:94-106
    DOI: 10.1016/j.jbankfin.2019.05.020
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    Cited by:

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    3. Chao He & Lawrence Kryzanowski & Yunfei Zhao, 2023. "Political connections of Chinese fund management companies and fund performance," The Financial Review, Eastern Finance Association, vol. 58(3), pages 597-627, August.
    4. Cao, Zhiqi & Lv, Dayong & Sun, Zhenzhen, 2021. "Stock price manipulation, short-sale constraints, and breadth-return relationship," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).

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    More about this item

    Keywords

    Portfolio pumping; Performance ranking; Mutual fund; Winner funds; Compensation; China;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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