IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v65y2019i12p5518-5534.html
   My bibliography  Save this article

Portfolio Manager Ownership and Mutual Fund Risk Taking

Author

Listed:
  • Linlin Ma

    (Peking University, HSBC Business School, Shenzhen 518055, China)

  • Yuehua Tang

    (University of Florida, Warrington College of Business, Gainesville, Florida 32611)

Abstract

This paper studies the effect of portfolio manager ownership (i.e., “skin in the game”) on mutual fund risk taking. Using holdings-based risk change measures that capture managers’ ex ante risk choices, we find that portfolio manager ownership reduces both intrayear and across-year risk-taking activities. The relationship between ownership and risk reduction is particularly strong among managers with high agency issue–induced risk-taking incentives—for example, managers who face a more convex flow-performance relationship, have poor past performance, or are not compensated based on long-term fund performance. Funds with greater managerial ownership are also associated with lower levels of total risk and downside risk. Overall, portfolio manager ownership serves as an incentive alignment mechanism and has important implications for mutual fund investors.

Suggested Citation

  • Linlin Ma & Yuehua Tang, 2019. "Portfolio Manager Ownership and Mutual Fund Risk Taking," Management Science, INFORMS, vol. 65(12), pages 5518-5534, December.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:12:p:5518-5534
    DOI: 10.1287/mnsc.2018.3104
    as

    Download full text from publisher

    File URL: https://doi.org/10.1287/mnsc.2018.3104
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2018.3104?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Joseph Chen & Harrison Hong & Ming Huang & Jeffrey D. Kubik, 2004. "Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization," American Economic Review, American Economic Association, vol. 94(5), pages 1276-1302, December.
    2. Jeffrey A. Busse & Qing Tong, 2012. "Mutual Fund Industry Selection and Persistence," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 2(2), pages 245-274.
    3. Berk, Jonathan B. & van Binsbergen, Jules H., 2015. "Measuring skill in the mutual fund industry," Journal of Financial Economics, Elsevier, vol. 118(1), pages 1-20.
    4. François Longin & Bruno Solnik, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, April.
    5. Linlin Ma & Yuehua Tang & Juan‐Pedro Gómez, 2019. "Portfolio Manager Compensation in the U.S. Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 74(2), pages 587-638, April.
    6. Wayne Ferson & Jerchern Lin, 2014. "Alpha and Performance Measurement: The Effects of Investor Disagreement and Heterogeneity," Journal of Finance, American Finance Association, vol. 69(4), pages 1565-1596, August.
    7. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2008. "Unobserved Actions of Mutual Funds," The Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2379-2416, November.
    8. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2015. "Scale and skill in active management," Journal of Financial Economics, Elsevier, vol. 116(1), pages 23-45.
    9. repec:bla:jfinan:v:55:y:2000:i:4:p:1655-1703 is not listed on IDEAS
    10. Jennifer Lynch Koski & Jeffrey Pontiff, 1999. "How Are Derivatives Used? Evidence from the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 54(2), pages 791-816, April.
    11. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    12. Kempf, Alexander & Ruenzi, Stefan & Thiele, Tanja, 2009. "Employment risk, compensation incentives, and managerial risk taking: Evidence from the mutual fund industry," Journal of Financial Economics, Elsevier, vol. 92(1), pages 92-108, April.
    13. Edwin J. Elton & Martin J. Gruber & Christopher R. Blake, 2001. "A First Look at the Accuracy of the CRSP Mutual Fund Database and a Comparison of the CRSP and Morningstar Mutual Fund Databases," Journal of Finance, American Finance Association, vol. 56(6), pages 2415-2430, December.
    14. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    15. Russ Wermers, 2000. "Mutual Fund Performance: An Empirical Decomposition into Stock‐Picking Talent, Style, Transactions Costs, and Expenses," Journal of Finance, American Finance Association, vol. 55(4), pages 1655-1695, August.
    16. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    17. Ang, Andrew & Chen, Joseph, 2002. "Asymmetric correlations of equity portfolios," Journal of Financial Economics, Elsevier, vol. 63(3), pages 443-494, March.
    18. Khorana, Ajay & Servaes, Henri & Wedge, Lei, 2007. "Portfolio manager ownership and fund performance," Journal of Financial Economics, Elsevier, vol. 85(1), pages 179-204, July.
    19. Edwin J. Elton & Martin J. Gruber & Christopher R. Blake, 2003. "Incentive Fees and Mutual Funds," Journal of Finance, American Finance Association, vol. 58(2), pages 779-804, April.
    20. K. J. Martijn Cremers & Antti Petajisto, 2009. "How Active Is Your Fund Manager? A New Measure That Predicts Performance," The Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3329-3365, September.
    21. Jennifer Huang & Clemens Sialm & Hanjiang Zhang, 2011. "Risk Shifting and Mutual Fund Performance," The Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2575-2616.
    22. Judith Chevalier & Glenn Ellison, 1999. "Are Some Mutual Fund Managers Better Than Others? Cross‐Sectional Patterns in Behavior and Performance," Journal of Finance, American Finance Association, vol. 54(3), pages 875-899, June.
    23. Fu, Richard & Wedge, Lei, 2011. "Managerial ownership and the disposition effect," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2407-2417, September.
    24. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    25. Suleyman Basak & Anna Pavlova & Alexander Shapiro, 2007. "Optimal Asset Allocation and Risk Shifting in Money Management," The Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1583-1621, 2007 21.
    26. repec:bla:jfinan:v:53:y:1998:i:5:p:1589-1622 is not listed on IDEAS
    27. Alexander Kempf & Stefan Ruenzi, 2008. "Tournaments in Mutual-Fund Families," The Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 1013-1036, April.
    28. Ping Hu & Jayant R. Kale & Marco Pagani & Ajay Subramanian, 2011. "Fund Flows, Performance, Managerial Career Concerns, and Risk Taking," Management Science, INFORMS, vol. 57(4), pages 628-646, April.
    29. Massimo Massa, 2009. "Incentives and Mutual Fund Performance: Higher Performance or Just Higher Risk Taking?," The Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1777-1815, May.
    30. Busse, Jeffrey A., 2001. "Another Look at Mutual Fund Tournaments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(1), pages 53-73, March.
    31. Martijn Cremers & Antti Petajisto, 2006. "How Active is Your Fund Manager? A New Measure That Predicts Performance," Yale School of Management Working Papers amz2370, Yale School of Management, revised 01 May 2009.
    32. Richard B. Evans, 2010. "Mutual Fund Incubation," Journal of Finance, American Finance Association, vol. 65(4), pages 1581-1611, August.
    33. Cremers, Martijn & Driessen, Joost & Maenhout, Pascal & Weinbaum, David, 2009. "Does Skin in the Game Matter? Director Incentives and Governance in the Mutual Fund Industry," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(6), pages 1345-1373, December.
    34. Allison L. Evans, 2008. "Portfolio Manager Ownership and Mutual Fund Performance," Financial Management, Financial Management Association International, vol. 37(3), pages 513-534, September.
    35. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. "Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March.
    36. Christopher G. Schwarz, 2012. "Mutual Fund Tournaments: The Sorting Bias and New Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 25(3), pages 913-936.
    37. Jeffrey L. Coles & Jose Suay & Denise Woodbury, 2000. "Fund Advisor Compensation in Closed‐End Funds," Journal of Finance, American Finance Association, vol. 55(3), pages 1385-1414, June.
    38. Jennifer Huang & Kelsey D. Wei & Hong Yan, 2007. "Participation Costs and the Sensitivity of Fund Flows to Past Performance," Journal of Finance, American Finance Association, vol. 62(3), pages 1273-1311, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wang, Hu, 2024. "ESG investment preference and fund vulnerability," International Review of Financial Analysis, Elsevier, vol. 91(C).
    2. Haoyue Zhang & Dayong Lv & Wenfeng Wu, 2022. "Why do bank‐affiliated mutual funds perform better in China?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(5), pages 4755-4782, December.
    3. Luo, Deming & Jiang, Sainan & Yao, Zhongwei, 2023. "Economic policy uncertainty and mutual fund risk shifting," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    4. Guoping Liu & Jerry Sun, 2024. "Independent legal directors’ attitudes toward bank CEO stock option awards," European Journal of Law and Economics, Springer, vol. 58(1), pages 149-173, August.
    5. Kryzanowski, Lawrence & Mohebshahedin, Mahmood, 2020. "Transparency and fund governance efficacy: The effect of the SEC'S disclosure rule on advisory contracts," Journal of Corporate Finance, Elsevier, vol. 62(C).
    6. Ibert, Markus, 2023. "What do mutual fund managers’ private portfolios tell us about their skills?," Journal of Financial Intermediation, Elsevier, vol. 53(C).
    7. Zhang, Ning & Zhang, Yue & Zong, Zhe, 2023. "Fund ESG performance and downside risk: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 86(C).
    8. Bührle, Anna Theresa & Yen, Chia-Yi, 2023. "Too much "skin in the game" ruins the game: Evidence from managerial capital gains taxes," ZEW Discussion Papers 23-028, ZEW - Leibniz Centre for European Economic Research, revised 2023.
    9. Mao, Mike Qinghao & Wong, Ching Hin, 2022. "Managerial commitment and heterogeneity in target-date funds," Journal of Empirical Finance, Elsevier, vol. 68(C), pages 1-19.
    10. Li, C. Wei & Tiwari, Ashish & Tong, Lin, 2022. "Mutual fund tournaments and fund Active Share," Journal of Financial Stability, Elsevier, vol. 63(C).
    11. Juan C. Reboredo & Luis A. Otero González, 2022. "Low carbon transition risk in mutual fund portfolios: Managerial involvement and performance effects," Business Strategy and the Environment, Wiley Blackwell, vol. 31(3), pages 950-968, March.
    12. Lee, John Byong-Tek & Ma, Jun & Margaritis, Dimitris & Yang, Wanyi, 2023. "Is anti-herding always a smart choice? Evidence from mutual funds," International Review of Financial Analysis, Elsevier, vol. 90(C).
    13. Chen, Jie & Lasfer, Meziane & Song, Wei & Zhou, Si, 2021. "Recession managers and mutual fund performance," Journal of Corporate Finance, Elsevier, vol. 69(C).
    14. Eraslan, Veysel & Omole, John & Sensoy, Ahmet & Ozdamar, Melisa, 2022. "Other people's money: A comparison of institutional investors," Emerging Markets Review, Elsevier, vol. 53(C).
    15. Wang, Hu & Li, Shouwei & Ma, Yuyin & Jiang, Shuyang, 2022. "Does investor sentiment affect fund crashes? Evidence from Chinese open-end funds," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).
    16. Ștefan VLĂDUȚESCU, 2019. "Managerial Style, Determinations And Risks," Social Sciences and Education Research Review, Department of Communication, Journalism and Education Sciences, University of Craiova, vol. 6(2), pages 115-130, November.
    17. Cui, Tianxiang & Ding, Shusheng & Jin, Huan & Zhang, Yongmin, 2023. "Portfolio constructions in cryptocurrency market: A CVaR-based deep reinforcement learning approach," Economic Modelling, Elsevier, vol. 119(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bührle, Anna Theresa & Yen, Chia-Yi, 2023. "Too much "skin in the game" ruins the game: Evidence from managerial capital gains taxes," ZEW Discussion Papers 23-028, ZEW - Leibniz Centre for European Economic Research, revised 2023.
    2. Cuthbertson, Keith & Nitzsche, Dirk & O'Sullivan, Niall, 2016. "A review of behavioural and management effects in mutual fund performance," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 162-176.
    3. Martin, Thorsten & Sonnenburg, Florian, 2015. "Managerial ownership changes and mutual fund performance," CFR Working Papers 16-03, University of Cologne, Centre for Financial Research (CFR).
    4. Li, C. Wei & Tiwari, Ashish & Tong, Lin, 2022. "Mutual fund tournaments and fund Active Share," Journal of Financial Stability, Elsevier, vol. 63(C).
    5. Chia-Ying Chan & Christine W. Lai & Liang-Chung Lee, 2017. "Strategic Choice of Risk: Evidence from Mutual Fund Families," Journal of Financial Services Research, Springer;Western Finance Association, vol. 51(1), pages 125-163, February.
    6. Jennifer Huang & Clemens Sialm & Hanjiang Zhang, 2011. "Risk Shifting and Mutual Fund Performance," The Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2575-2616.
    7. Clemens Sialm & T. Mandy Tham, 2016. "Spillover Effects in Mutual Fund Companies," Management Science, INFORMS, vol. 62(5), pages 1472-1486, May.
    8. Haoyue Zhang & Dayong Lv & Wenfeng Wu, 2022. "Why do bank‐affiliated mutual funds perform better in China?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(5), pages 4755-4782, December.
    9. Emmanuel Mamatzakis & Mike Tsionas, 2018. "A Bayesian dynamic model to test persistence in funds' performance," Working Paper series 18-23, Rimini Centre for Economic Analysis.
    10. Agarwal, Vikas & Ma, Linlin & Mullally, Kevin, 2015. "Managerial multitasking in the mutual fund industry," CFR Working Papers 13-10 [rev.], University of Cologne, Centre for Financial Research (CFR).
    11. Servaes, Henri & Sigurdsson, Kari, 2022. "The Costs and Benefits of Performance Fees in Mutual Funds," Journal of Financial Intermediation, Elsevier, vol. 50(C).
    12. Juan C. Reboredo & Luis A. Otero González, 2022. "Low carbon transition risk in mutual fund portfolios: Managerial involvement and performance effects," Business Strategy and the Environment, Wiley Blackwell, vol. 31(3), pages 950-968, March.
    13. Kempf, Alexander & Ruenzi, Stefan & Thiele, Tanja, 2009. "Employment risk, compensation incentives, and managerial risk taking: Evidence from the mutual fund industry," Journal of Financial Economics, Elsevier, vol. 92(1), pages 92-108, April.
    14. Ferson, Wayne & Mo, Haitao, 2016. "Performance measurement with selectivity, market and volatility timing," Journal of Financial Economics, Elsevier, vol. 121(1), pages 93-110.
    15. Massa, Massimo, 2015. "Short-Sale Constraints and the Pricing of Managerial Skills," CEPR Discussion Papers 10447, C.E.P.R. Discussion Papers.
    16. Elton, Edwin J. & Gruber, Martin J., 2013. "Mutual Funds," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1011-1061, Elsevier.
    17. Eliezer Fich & Viktoriya Lantushenko & Clemens Sialm, 2019. "Institutional Trading Around M&A Announcements," NBER Working Papers 25814, National Bureau of Economic Research, Inc.
    18. Ľuboš Pástor & Robert F. Stambaugh & Lucian A. Taylor, 2017. "Do Funds Make More When They Trade More?," Journal of Finance, American Finance Association, vol. 72(4), pages 1483-1528, August.
    19. Livingston, Miles & Yao, Ping & Zhou, Lei, 2019. "The volatility of mutual fund performance," Journal of Economics and Business, Elsevier, vol. 104(C), pages 1-1.
    20. Dahm, Laura K. & Sorhage, Christoph, 2015. "Milk or wine: Mutual funds' (dis)economies of life," CFR Working Papers 15-05, University of Cologne, Centre for Financial Research (CFR).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:65:y:2019:i:12:p:5518-5534. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.