Risk Taking by Mutual Funds as a Response to Incentives

Posted: 14 Sep 1995

See all articles by Judith A. Chevalier

Judith A. Chevalier

Yale School of Management; National Bureau of Economic Research (NBER)

Glenn Ellison

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

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Abstract

This paper examines the agency conflict between mutual fund investors and mutual fund companies. Investors would like the fund company to use its judgment to maximize risk- adjusted fund returns. A fund company, however, in its desire to maximize its value as a concern has an incentive to take actions which increase the inflow of investment. We use a semiparametric model to estimate the shape of the flow-performance relationship for a sample of growth and growth and income funds observed over the 1982-1992 period. The shape of the flow-performance relationship creates incentives for fund managers to increase or decrease the riskiness of the fund which are dependent on the fund's year-to-date return. Using a new data set of mutual fund portfolios which includes equity portfolio holdings for September and December of the same year, we show that mutual funds do alter their portfolio riskiness between September and December in a manner consistent with these risk incentives.

JEL Classification: G23, G11, L15

Suggested Citation

Chevalier, Judith A. and Ellison, Glenn David, Risk Taking by Mutual Funds as a Response to Incentives. Available at SSRN: https://ssrn.com/abstract=6699

Judith A. Chevalier (Contact Author)

Yale School of Management ( email )

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Glenn David Ellison

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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