Do Zombie Funds Gamble for Resurrection? Evidence from the US Corporate Bond Market
42 Pages Posted: 7 Nov 2017
Date Written: November 6, 2017
We explore the risk-taking behavior of bond mutual funds. We find that funds facing a high risk of runs (zombie funds) shift portfolio allocation towards high-risk, high-reward securities. By contrast, outperforming funds (star funds) reduce risk-taking. This strategic behavior is consistent with the evidence on the concavity of the flow-performance relation: zombie funds have an incentive to gamble for resurrection, increasing returns to avoid runs, whereas star funds have little or no incentive for taking additional risk. We provide evidence that these strategies affect the volatility and skewness of realized fund performance, and increase the cost of distress for ultimate investors when zombie funds shut down.
Keywords: Bond Mutual Funds, Risk-Taking, Gambling for Resurrection, Moral Hazard, Tournaments, Flow-Performance Sensitivity
JEL Classification: G11, G23, G32, E43
Suggested Citation: Suggested Citation