Not Just One Bet: Portfolio Managers' Cross Fund Risk-Taking

Abstract

This paper documents that mutual fund managers who experience distress in one fund subsequently take on more risk in other funds they manage. Specifically, portfolio managers actively reallocate more stocks with higher systematic risk and lottery-like features in their linked funds. This increased risk-taking appears to be primarily motivated by managers' compensation contracts and is value-destroying for fund investors. The response to the distress shock is smaller for portfolio managers with long-term incentive compensation contracts, longer-tenured managers and female managers. These results highlight fund spillover effects through common portfolio managers and agency conflicts in the mutual fund industry.

Keywords: Portfolio managers, Mutual funds, Distress, Risk-taking

JEL Classification: G11, G23, G32