Time-varying incentives in the mutual fund industry
AbstractIn this paper, the authors provide evidence that the convexity of the flow-performance relationship in the mutual fund industry varies with economic activity. This effect is strongly economically significant: a +/-1% change in GDP growth doubles/eliminates the degree of convexity of the flow-performance relationship. The effect of economic activity dominates that of market conditions and can be rationalized by the behavior of investors who smooth consumption while displaying a disposition effect. Our finding has two major implications: first, it rationalizes the risk-shifting behavior of mutual fund managers and provides support for the seminal flow-based tournament hypothesis over the more recent "career concern" explanation. Second, it explains why mutual fund performance varies with the business cycle.
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Bibliographic InfoPaper provided by HEC Paris in its series Les Cahiers de Recherche with number 925.
Length: 42 pages
Date of creation: 01 Nov 2009
Date of revision:
Mutual funds; Incentives; Economic activity; Risk-shifting; Performance;
Find related papers by 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-28 (All new papers)
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