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Fund Flows, Performance, Managerial Career Concerns, and Risk-Taking

Management Science, Forthcoming

54 Pages Posted: 14 Dec 2010  

Ping Hu

affiliation not provided to SSRN

Jayant R. Kale

Northeastern University

Marco Pagani

San Jose State University

Ajay Subramanian

Georgia State University

Multiple version iconThere are 2 versions of this paper

Date Written: December 13, 2010


We develop a unified model of the interactions among investors, fund companies and fund managers. We show that the interplay between a manager's incentives from her compensation structure and career concerns leads to a non-monotonic (approximately U-shaped) relation between her risk choices and prior performance relative to her peers. Significantly out-performing (under-performing) managers are less (more) likely to be fired in the future, and are also more likely to increase relative risk. Ceteris paribus, relative risk declines with the level of employment risk faced by a manager. Using a large sample of mutual fund managers, we find strong support for the hypothesized U-shaped relation between relative risk and prior performance. Our findings also highlight the importance of employment risk as the underlying driver of risk-shifting by fund managers. Our theoretical model also generates additional hypotheses that link determinants of the fund flow-performance relation and managers’ employment risk to their risk-taking behavior. In support, our empirical analysis shows that funds with higher expense ratios have less convex fund flow-performance relations and less convex U-shaped relations between relative risk and prior performance; funds with younger managers, who face greater employment risk, have more convex U-shaped relative risk-prior performance relations; and managers in larger fund families have lower incentives to engage in risk-shifting, thereby leading to a less convex U-shaped relation.

Keywords: Mutual Funds, Asset Flows, Relative Risk, Ability, Career Concerns, Employment Risk

JEL Classification: G10, C61, D81

Suggested Citation

Hu, Ping and Kale, Jayant R. and Pagani, Marco and Subramanian, Ajay, Fund Flows, Performance, Managerial Career Concerns, and Risk-Taking (December 13, 2010). Management Science, Forthcoming. Available at SSRN:

Ping Hu

affiliation not provided to SSRN ( email )

Jayant Raghunath Kale

Northeastern University ( email )

Boston, MA 02115
United States

Marco Pagani

San Jose State University ( email )

San Jose, CA 95192-0066
United States
408-924-3477 (Phone)
408-924-3463 (Fax)

Ajay Subramanian (Contact Author)

Georgia State University ( email )

Depts. of Finance & Risk Management and Insurance
P.O. Box 4050
Atlanta, GA 30303
United States
404-413-7483 (Phone)


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