Delegated portfolio management and risk-taking behavior

Jose Luiz Barros Fernandes, Juan Ignacio Pena and Benjamin Tabak

The European Journal of Finance, 2010, vol. 16, issue 4, 353-372

Abstract: Standard models of moral hazard predict a negative relationship between risk and incentives; however, empirical studies on mutual funds present mixed results. In this article, we propose a behavioral principal-agent model in the context of professional managers, focusing on active and passive investment strategies. Using this general framework, we evaluate how incentives affect the risk-taking behavior of managers, considering the standard moral hazard model as a special case, and solve the previous contradiction. Empirical evidence, based on a comprehensive world sample of 4584 mutual funds, gives support to our theoretical model.

Keywords: agency model; prospect theory; mutual funds (search for similar items in EconPapers)
Date: 2010
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Working Paper: Delegated Portfolio Management and Risk Taking Behavior (2009)
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DOI: 10.1080/13518470903314444

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