Time-varying incentives in the mutual fund industry

Jacque Olivier () and Anthony Tay ()

No 925, HEC Research Papers Series from HEC Paris

Abstract: In this paper, the authors provide evidence that the convexity of the flow-performance relationship in the mutual fund industry varies with economic activity. This effect is strongly economically significant: a +/-1% change in GDP growth doubles/eliminates the degree of convexity of the flow-performance relationship. The effect of economic activity dominates that of market conditions and can be rationalized by the behavior of investors who smooth consumption while displaying a disposition effect. Our finding has two major implications: first, it rationalizes the risk-shifting behavior of mutual fund managers and provides support for the seminal flow-based tournament hypothesis over the more recent "career concern" explanation. Second, it explains why mutual fund performance varies with the business cycle.

Keywords: Mutual funds; Incentives; Economic activity; Risk-shifting; Performance (search for similar items in EconPapers)
JEL-codes: G11 G23 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2009-11-01
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:0925

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