Mandated Performance Disclosure and Managerial Risk-Taking

Abstract

I document that mandated performance disclosure increased managerial risk-taking, resulting in significant unintended consequences and agency conflicts. After the SEC required that all mutual funds disclose a self-selected primary benchmark, I find that most fund managers chose a benchmark that was not the best fit index. Furthermore, I provide evidence that actively managed funds increased risk-taking relative to their disclosed benchmarks in response to the disclosure change. I also find that the mandated disclosure requirement exacerbated the well-documented tendency of managers who underperform during the first half of the year to increase the risks they take in the second half of the year.

Keywords: Mutual Funds, Disclosure Regulation, Real Effects, Externalities, Financial Reporting, Managerial Incentives

JEL Classification: G14, G18, G30, G38, K20, M41