Effort and Risk-Taking in Mutual Fund Competition
20 Pages Posted: 12 May 2011
Date Written: May 1, 2011
The paper analyses effort and risk-taking behavior of fund managers in a tournament framework where they can choose not only the risk level but can also adjust their effort to achieve the highest relative performance and win the competition. The results show that when effort is costly, the interim winning fund exerts higher effort and chooses a lower risk than the interim loosing fund as documented in standard literature. However, when effort is less costly, the winning fund imitates and chooses the same risk level as the loosing fund like in Taylor (2003). Empirical verifications conducted on a sample of US domestic growth-oriented mutual funds over the period 1/1999-12/2008 provide evidences supporting our theoretical predictions.
Suggested Citation: Suggested Citation