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Time-Varying Incentives in the Mutual Fund Industry

Author

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  • Anthony Tay

    (SMU)

Abstract

This paper re-examines the incentives of mutual fund managers arising from investor flows. We provide evidence that the convexity of the flow-performance relationship varies with economic activity. We show that the effect is economically large and is not driven by abnormal years. We test two possible channels through which this pattern may arise. We investigate implications of the time-varying convexity for the incentives of managers to alter strategically the risk of their portfolios. We provide evidence that poor mid-year performers increase the risk of the portfolio only when economic activity is strong. Finally, we briefly discuss some methodological implications.

Suggested Citation

  • Anthony Tay, 2008. "Time-Varying Incentives in the Mutual Fund Industry," Finance Working Papers 22484, East Asian Bureau of Economic Research.
    • Handle: RePEc:eab:financ:22484
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    File URL: http://www.eaber.org/node/22484
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    More about this item

    Keywords

    Mutual funds; incentives; Flow-Performance Relationship; Convexity; Business cycles;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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