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Risk Taking by Mutual Funds as a Response to Incentives

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Author Info
Chevalier, Judith
Ellison, Glenn

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Abstract

This paper examines a potential agency conflict between mutual fund investors and mutual fund companies. Investors would like the fund company to use its judgment to maximize risk-adjusted fund returns, the fund company has an incentive to increase the inflow of investments. The authors estimate the shape of the flow-performance relationship for a sample of growth and growth and income funds observed over the 1982-92 period. The shape creates incentives for fund managers to alter the riskiness of their portfolios. Examining portfolio holdings, the authors find that risk levels are changed toward the end of the year in a manner consistent with these incentives. Copyright 1997 by the University of Chicago.

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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 105 (1997)
Issue (Month): 6 (December)
Pages: 1167-1200
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Handle: RePEc:ucp:jpolec:v:105:y:1997:i:6:p:1167-1200

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bull, Clive & Schotter, Andrew & Weigelt, Keith, 1987. "Tournaments and Piece Rates: An Experimental Study," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 1-33, February. [Downloadable!] (restricted)
    Other versions:
  2. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March. [Downloadable!] (restricted)
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  3. Grinblatt, Mark & Titman, Sheridan D, 1989. "Mutual Fund Performance: An Analysis of Quarterly Portfolio Holdings," Journal of Business, University of Chicago Press, vol. 62(3), pages 393-416, July. [Downloadable!] (restricted)
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  4. Zwiebel, Jeffrey, 1995. "Corporate Conservatism and Relative Compensation," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 1-25, February. [Downloadable!] (restricted)
  5. Borenstein, Severin & Zimmerman, Martin B, 1988. "Market Incentives for Safe Commercial Airline Operation," American Economic Review, American Economic Association, vol. 78(5), pages 913-35, December. [Downloadable!] (restricted)
  6. Scharfstein, David. & Stein, Jeremy C., 1988. "Herd behavior and investment," Working papers WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
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  7. Ronald G. Ehrenberg & Michael L. Bognanno, 1990. "The incentive effects of tournaments revisited: Evidence from the European PGA tour," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 43(3), pages 74-88, February.
  8. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April. [Downloadable!] (restricted)
  9. Ippolito, Richard A, 1992. "Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry," Journal of Law & Economics, University of Chicago Press, vol. 35(1), pages 45-70, April.
  10. Borland, Jeff, 1992. " Career Concerns: Incentives and Endogenous Learning in Labour Markets," Journal of Economic Surveys, Blackwell Publishing, vol. 6(3), pages 251-70.
  11. Glenn Ellison & Sara Fisher Ellison, 1998. "A Simple Framework for Nonparametric Specification Testing," NBER Technical Working Papers 0234, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Ehrenberg, Ronald G & Bognanno, Michael L, 1990. "Do Tournaments Have Incentive Effects?," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1307-24, December. [Downloadable!] (restricted)
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