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Employment risk, compensation incentives and managerial risk taking: Evidence from the mutual fund industry

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  • Kempf, Alexander
  • Ruenzi, Stefan
  • Thiele, Tanja

Abstract

We examine the influence on managerial risk taking of incentives due to employment risk and due to compensation. Our empirical investigation of the risk taking behavior of mutual fund managers indicates that managerial risk taking crucially depends on the relative importance of these incentives. When employment risk is more important than compensation incentives, fund managers with a poor midyear performance tend to decrease risk relative to leading managers to prevent potential job loss. When employment risk is low, compensation incentives become more relevant and fund managers with a poor midyear performance increase risk to catch up with the midyear winners. --

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Bibliographic Info

Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 07-02.

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Date of creation: 2008
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Handle: RePEc:zbw:cfrwps:0702

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Keywords: Managerial Risk Taking; Employment Risk; Compensation Incentives; Mutual Funds; Restrictions;

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References

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Citations

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Cited by:
  1. 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.
  2. 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).
  3. Olivier, Jacques & Tay, Anthony, 2008. "Time-Varying Incentives in the Mutual Fund Industry," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6893, C.E.P.R. Discussion Papers.
  4. Mara Faccio & Maria-Teresa Marchica & Roberto Mura, 2010. "Large Shareholder Diversification And Corporate Risk- Taking," Purdue University Economics Working Papers 1241, Purdue University, Department of Economics.
  5. Navone, Marco, 2012. "Investors’ distraction and strategic repricing decisions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(5), pages 1291-1303.
  6. Jennifer Huang & Clemens Sialm & Hanjiang Zhang, 2011. "Risk Shifting and Mutual Fund Performance," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 24(8), pages 2575-2616.
  7. Scalia, Antonio & Sahel, Benjamin, 2011. "Ranking, risk-taking and effort: an analysis of the ECB's foreign reserves management," Working Paper Series, European Central Bank 1377, European Central Bank.
  8. Krishnan Sharma, 2012. "Financial sector compensation and excess risk-taking—a consideration of the issues and policy lessons," Working Papers, United Nations, Department of Economics and Social Affairs 115, United Nations, Department of Economics and Social Affairs.
  9. Bradley, Michael & Chen, Dong, 2011. "Corporate governance and the cost of debt: Evidence from director limited liability and indemnification provisions," Journal of Corporate Finance, Elsevier, Elsevier, vol. 17(1), pages 83-107, February.
  10. Michaela Bär & Alexander Kempf & Stefan Ruenzi, 2010. "Is a Team Different from the Sum of its Parts? Evidence from Mutual Fund Managers," Review of Finance, European Finance Association, European Finance Association, vol. 15(2), pages 359-396.
  11. Cullen, Grant & Gasbarro, Dominic & Monroe, Gary S. & Zumwalt, J. Kenton, 2012. "Changes to mutual fund risk: Intentional or mean reverting?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(1), pages 112-120.
  12. Raviv, Alon & Sisli-Ciamarra, Elif, 2013. "Executive compensation, risk taking and the state of the economy," Journal of Financial Stability, Elsevier, Elsevier, vol. 9(1), pages 55-68.
  13. Grund, Christian & Höcker, Jan & Zimmermann, Stefan, 2010. "Risk Taking Behavior in Tournaments: Evidence from the NBA," IZA Discussion Papers 4812, Institute for the Study of Labor (IZA).
  14. J. Carlos Matallín-Sáez & Amparo Soler-Domínguez & Emili Tortosa-Ausina, 2013. "Does active management add value? New evidence from a quantile regression," Working Papers, Economics Department, Universitat Jaume I, Castellón (Spain) 2013/01, Economics Department, Universitat Jaume I, Castellón (Spain).
  15. Teodora Paligorova, 2010. "Corporate Risk Taking and Ownership Structure," Working Papers, Bank of Canada 10-3, Bank of Canada.
  16. 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, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) 2013-02, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  17. Pikulina, E.S. & Renneboog, L.D.R. & Horst, J.R. ter & Tobler, P.N., 2013. "Bonus Schemes and Trading Activity," Discussion Paper, Tilburg University, Center for Economic Research 2013-030, Tilburg University, Center for Economic Research.
  18. Navone, Marco, 2012. "Reprint of Investors’ distraction and strategic repricing decisions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(10), pages 2729-2741.
  19. Pütz, Alexander & Ruenzi, Stefan, 2010. "Overconfidence among professional investors: Evidence from mutual fund managers," CFR Working Papers 08-08 [rev.], University of Cologne, Centre for Financial Research (CFR).
  20. Anthony Tay, 2008. "Time-Varying Incentives in the Mutual Fund Industry," Finance Working Papers 22484, East Asian Bureau of Economic Research.

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