Employment Risk, Compensation Incentives and Managerial Risk Taking: Evidence from the Mutual Fund Industry

36 Pages Posted: 26 Feb 2007

See all articles by Alexander Kempf

Alexander Kempf

University of Cologne - Department of Finance & Centre for Financial Research (CFR)

Tanja Thiele

University of Cologne - Centre for Financial Research (CFR)

Stefan Ruenzi

University of Mannheim - Department of International Finance

Date Written: February 2007

Abstract

We examine the influence of employment risk and compensation incentives on managerial risk taking. Our empirical investigation of the risk taking behavior of equity fund managers during 1980 to 2003 shows that managerial risk taking crucially depends on the relative importance of these incentives. When employment risk is high, managers that lag behind tend to decrease risk relative to leading managers in order to prevent potential job loss. When employment risk is low, compensation incentives dominate and lagging managers increase risk in order to catch up with the winners.

Keywords: Managerial Risk Taking, Employment Risk, Compensation Incentives, Mutual Funds, Restrictions

JEL Classification: G23, M54

Suggested Citation

Kempf, Alexander and Thiele, Tanja and Ruenzi, Stefan, Employment Risk, Compensation Incentives and Managerial Risk Taking: Evidence from the Mutual Fund Industry (February 2007). Available at SSRN: https://ssrn.com/abstract=964923 or http://dx.doi.org/10.2139/ssrn.964923

Alexander Kempf

University of Cologne - Department of Finance & Centre for Financial Research (CFR) ( email )

Cologne, 50923
Germany
+49 221 470 2714 (Phone)
+49 221 470 3992 (Fax)

Tanja Thiele

University of Cologne - Centre for Financial Research (CFR) ( email )

Albertus-Magnus Platz
Cologne, 50923
Germany

Stefan Ruenzi (Contact Author)

University of Mannheim - Department of International Finance ( email )

L9, 1-2
Mannheim, 68131
Germany

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