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Portfolio Manager Ownership and Mutual Fund Risk Taking

Author

Listed:
  • Linlin Ma

    (Peking University, HSBC Business School, Shenzhen 518055, China)

  • Yuehua Tang

    (University of Florida, Warrington College of Business, Gainesville, Florida 32611)

Abstract

This paper studies the effect of portfolio manager ownership (i.e., “skin in the game”) on mutual fund risk taking. Using holdings-based risk change measures that capture managers’ ex ante risk choices, we find that portfolio manager ownership reduces both intrayear and across-year risk-taking activities. The relationship between ownership and risk reduction is particularly strong among managers with high agency issue–induced risk-taking incentives—for example, managers who face a more convex flow-performance relationship, have poor past performance, or are not compensated based on long-term fund performance. Funds with greater managerial ownership are also associated with lower levels of total risk and downside risk. Overall, portfolio manager ownership serves as an incentive alignment mechanism and has important implications for mutual fund investors.

Suggested Citation

  • Linlin Ma & Yuehua Tang, 2019. "Portfolio Manager Ownership and Mutual Fund Risk Taking," Management Science, INFORMS, vol. 65(12), pages 5518-5534, December.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:12:p:5518-5534
    DOI: 10.1287/mnsc.2018.3104
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