Incentives of Fund Managers and Precautionary Fire Sales

59 Pages Posted: 2 Nov 2021

See all articles by Abhishek Bhardwaj

Abhishek Bhardwaj

Tulane University

Kose John

New York University (NYU) - Department of Finance

Saptarshi Mukherjee

Northeastern University

Date Written: October 29, 2021


This paper investigates how precautionary trading behavior of fund managers induced by a higher junior fee component in their compensation structure affects prices of downgraded loans in the leveraged loans market. Using detailed portfolio data from Collateralized Loan Obligation (CLO) funds, we find that fund managers with a higher ratio of subordinate fee to total fees are more likely to sell downgraded loans. Fund managers exhibit such precautionary trading behavior even when currently unconstrained, in anticipation of future binding collateral constraints. Loans subject to a high probability of precautionary selling exhibit large price declines and subsequent reversals. Our results provide new insights into the role of incentives on managerial risk taking and consequent amplification of fire sale externalities in the corporate debt market.

Keywords: Managerial Incentives, Fire Sales, Collateralized Loan Obligations, Leveraged Loans

JEL Classification: G11, G21, G23, G32, G34

Suggested Citation

Bhardwaj, Abhishek and John, Kose and Mukherjee, Saptarshi, Incentives of Fund Managers and Precautionary Fire Sales (October 29, 2021). Available at SSRN: or

Abhishek Bhardwaj

Tulane University ( email )

6823 St Charles Ave
New Orleans, LA 70118
United States


Kose John

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Saptarshi Mukherjee (Contact Author)

Northeastern University ( email )

360 Huntington Ave
409C Hayden Hall
Boston, MA Massachusetts 02115
United States
02115 (Fax)

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