Impact of Managerial Commitment on Risk Taking with Dynamic Fund Flows

50 Pages Posted: 11 Sep 2017

See all articles by Ron Kaniel

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Stathis Tompaidis

University of Texas at Austin - McCombs School of Business

Ti Zhou

Independent

Multiple version iconThere are 2 versions of this paper

Date Written: September 2017

Abstract

We present a model with dynamic investment flows, where fund managers have the ability to generate excess returns and study how forcing them to commit part or all of their personal wealth to the fund they manage affects fund risk taking. We contrast the behavior of a manager that may invest her personal wealth in a private account to a manager that is either forced to commit her wealth to the fund she manages, or a manager who is not allowed to hold risky assets held by the fund privately. We show that a fund managed by a manager with higher ability does not necessarily achieve higher expected returns but achieves lower idiosyncratic volatility. For a manager with constant ability, restrictions placed on her personal account do not influence her choices in the fund, while for a manager whose ability varies stochastically they result in higher expected returns and idiosyncratic volatilities. Fund strategies can be non-monotone both in the manager's commitment level and the ratio of manager to investor wealth. Our results are robust to incomplete information and to competing managers with correlated ability.

Keywords: commitment, flows, mutual fund, portfolio

Suggested Citation

Kaniel, Ron and Tompaidis, Stathis and Zhou, Ti, Impact of Managerial Commitment on Risk Taking with Dynamic Fund Flows (September 2017). CEPR Discussion Paper No. DP12285. Available at SSRN: https://ssrn.com/abstract=3035281

Ron Kaniel (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

London
United Kingdom

Stathis Tompaidis

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

Ti Zhou

Independent ( email )

No Address Available

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