Performance Changes following Top Management Turnover: Evidence from Open-End Mutual Funds

I examine the impact of mutual fund manager replacement on subsequent fund performance. Using a sample of 393 domestic equity and bond fund managers that were replaced over the 1979–1991 period, for the underperformers, I document significant improvements in post-replacement performance relative to the past performance of the fund. On the other hand, the replacement of overperforming managers results in deterioration in post-replacement performance. I find evidence supporting the presence of strategic risk shifting in the fund portfolios prior to replacement. Futhermore, consistent with the notion of window dressing, I document that the level of portfolio turnover activity decreases significantly in the post-replacement period. Lastly, the replacement of poor performers is preceded by significant decreases in net new inflows in the fund.