Business Publications
Document Type
Article
Publication Date
9-2019
Volume
74
Issue
5
Journal
The Journal of Finance
First Page
2543
URL with Digital Object Identifier
https://doi.org/10.1111/jofi.12823
Last Page
2577
Abstract
Most mutual fund managers have performance-based contracts that are incomplete. We study risk-shifting implications emanating from these contracts. Our theory predicts that mutual fund managers with asymmetric contracts and mid-year performance close to their announced benchmark increase their portfolio risk in the second part of the year. As predicted by our theory, performance deviation from the benchmark decreases risk-shifting only for managers with performance contracts. Deviation from the benchmark dominates other incentives in the literature, suggesting that risk-shifting is motivated more by management contracts than by a tournament to capture flows.
Notes
This is the authors' version of the article published in The Journal of Finance and available at https://doi.org/10.1111/jofi.12823.