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Fund Flows, Performance, Managerial Career Concerns, and Risk Taking

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Author Info

  • Ping Hu

    ()
    (Risk Analytics, Corporate Finance, Wells Fargo, Charlotte, North Carolina 28202)

  • Jayant R. Kale

    ()
    (Department of Finance, J. Mack Robinson College of Business, Georgia State University, Atlanta, Georgia 30303)

  • Marco Pagani

    ()
    (Department of Accounting and Finance, San José State University, San José, California 95192)

  • Ajay Subramanian

    ()
    (Department of Risk Management and Insurance, J. Mack Robinson College of Business, Georgia State University, Atlanta, Georgia 30303)

Abstract

We develop a unified model of the interactions among investors, fund companies, and fund managers. We show that the interplay between a manager's incentives from her compensation structure and career concerns leads to a nonmonotonic (approximately U-shaped) relation between her risk choices and prior performance relative to her peers. Significantly outperforming (underperforming) managers are less (more) likely to be fired in the future and are also more likely to increase relative risk. Ceteris paribus, relative risk declines with the level of employment risk faced by a manager. Using a large sample of mutual fund managers, we find strong support for the hypothesized U-shaped relation between relative risk and prior performance. Our findings also highlight the importance of employment risk as the underlying driver of risk shifting by fund managers. Our theoretical model also generates additional hypotheses that link determinants of the fund flow-performance relation and managers' employment risk to their risk-taking behavior. In support, our empirical analysis shows that funds with higher expense ratios have less convex fund flow-performance relations and less convex U-shaped relations between relative risk and prior performance; funds with younger managers, who face greater employment risk, have more convex U-shaped relative risk-prior performance relations; and managers in larger fund families have lower incentives to engage in risk shifting, thereby leading to a less convex U-shaped relation. This paper was accepted by Wei Xiong, finance.

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File URL: http://dx.doi.org/10.1287/mnsc.1100.1305
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 57 (2011)
Issue (Month): 4 (April)
Pages: 628-646

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Handle: RePEc:inm:ormnsc:v:57:y:2011:i:4:p:628-646

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Related research

Keywords: mutual funds; asset flows; relative risk; ability; career concerns; employment risk;

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Cited by:
  1. Agarwal, Vikas & Ma, Linlin, 2013. "Managerial multitasking in the mutual fund industry," CFR Working Papers 13-10, University of Cologne, Centre for Financial Research (CFR).
  2. Jennifer Huang & Clemens Sialm & Hanjiang Zhang, 2009. "Risk Shifting and Mutual Fund Performance," NBER Working Papers 14903, National Bureau of Economic Research, Inc.
  3. Citci, Haluk & Inci, Eren, 2012. "The Masquerade Ball of the CEOs and the Mask of Excessive Risk," MPRA Paper 35979, University Library of Munich, Germany.
  4. Amparo Soler Domínguez & Juan Carlos Matallín Sáez & Emili Tortosa-Ausina, 2013. "Does active management add value? New evidence from a quantile regression approach," Working Papers. Serie EC 2013-02, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  5. Kempf, Alexander & Ruenzi, Stefan & Thiele, Tanja, 2009. "Employment risk, compensation incentives, and managerial risk taking: Evidence from the mutual fund industry," Journal of Financial Economics, Elsevier, vol. 92(1), pages 92-108, April.
  6. J. Carlos Matallín-Sáez & Amparo Soler-Domínguez & Emili Tortosa-Ausina, 2013. "Does active management add value? New evidence from a quantile regression," Working Papers 2013/01, Economics Department, Universitat Jaume I, Castellón (Spain).

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