54 Pages Posted: 12 Jun 2020 Last revised: 27 Sep 2021
Date Written: May 19, 2020
We examine how corporate bond fund managers manipulate portfolio risk in response to incentives. We find that liquidity risk concerns drive the allocation decisions of underperforming funds, whereas tournament incentives are of secondary importance. This leads laggard fund managers to trade off yield for liquidity, while holding the exposure to other sources of risk constant. The documented de-risking is stronger for managers with shorter tenure and is reinforced by a more concave flow-to-performance sensitivity and by periods of market stress. De-risking meaningfully reduces ex post liquidation costs. Flexible NAVs (swing pricing) may, however, reduce de-risking incentives and create moral hazard.
Keywords: Bond mutual funds, liquidity, tournaments, risk, swing pricing
JEL Classification: G11, G23, G32, E43
Suggested Citation: Suggested Citation