Risk Taking by Mutual Funds as a Response to Incentives

Abstract

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Overconfidence Among Professional Investors: Evidence from Mutual Fund Managers

“…11 Tournament behavior of fund managers is also examined in, e.g., Chevalier and Ellison (1997), Elton et al (2003), andKempf et al (2009).…”

Do Investment Flows Drive the Disposition Effect on Fund Managers?

“…The net flow ratio is the proportion of total asset changes, but this excludes the return from holding assets. To reduce the heterogeneity of fund size, we exclude funds with Chevalier and Ellison (1997) use MorningStar database to study the behavior of fund managers. The stock holdings are reported on the basis of a fund portfolio, and the portfolio may be held by one or many classes of funds.…”

“…As Frazzini (2006) argued that if investors under react to news, information would transfers slowly and fund manager trading can not immediately reveal information content, which would leading to post price drift. Chevalier and Ellison (1997) used the data of mutual fund over the period of 1982-1992 to test how flow-performance relationship is relevant with fund manager's psychology. He document that the flow-performance relationship influences the riskness magnitude of fund's portfolio allocation, and thus creates herd behavior of fund manager, while this behavior is not significantly related with the incentive scheme of career concern.…”

“…The study motivation of how fund flow drives stock selling of fund starts from the argument of trading incentive of fund managers. Chevalier and Ellison (1997) document that the risk preference of fund portfolio is more significantly related with the incentive to maximizing the fund's inflow rather fund investors' profit. Funds aim at increasing capital inflows by altering the asset allocation of mutual fund.…”

Strategic Asset Allocation

“…First, given the prevalent finding in money management that the money flows to relative performance relationship is increasing and convex (Chevalier and Ellison (1997), Sirri and Tufano (1998)) for individual mutual funds, Gallaher, Kaniel, and Starks (2006) for mutual fund families, Agarwal, Daniel, and Naik (2004), Ding, Getmansky, Liang and Wermers (2007) for hedge funds), a fund manager has incentives to outperform the peers so as to increase her assets under management, and hence, her compensation. 1 Relative concerns may also arise within fund families as funds with high relative performance are likely to be advertised more (Jain and Wu (2000)) and also to be cross-subsidized at the expense of other family members (Gaspar, Massa, and Matos (2006)).…”