Managerial Risk Assessment and Fund Performance: Evidence from Textual Disclosure

52 Pages Posted: 18 Apr 2022 Last revised: 30 May 2023

See all articles by Sean Cao

Sean Cao

University of Maryland - Robert H. Smith School of Business

Baozhong Yang

Georgia State University

Alan L. Zhang

Florida International University (FIU)

Date Written: May 19, 2023

Abstract

Fund managers' ability to evaluate risk has important implications for their portfolio management and performance. We use a state-of-the-art deep learning model to measure fund managers' forward-looking risk assessments from their narrative discussions. We validate that managers' negative (positive) risk assessments lead to subsequent decreases (increases) in their portfolio risk-taking. However, only managers who identify negative risk generate superior risk-adjusted returns and higher Sharpe ratios, consistent with the evidence that cautious managers have better intraquarter trading skills and are less subject to overconfidence biases. Only sophisticated investors respond to the narrative-based risk assessment measure, suggesting limited attention by retail investors.

Keywords: Deep Learning, Machine Learning, Mutual Fund, Disclosure, Textual Analysis, Sentiment, Risk Assessment, Fund Performance, Fund Skill

JEL Classification: C45, G11, G14, G23

Suggested Citation

Cao, Sean S. and Yang, Baozhong and Zhang, Alan L., Managerial Risk Assessment and Fund Performance: Evidence from Textual Disclosure (May 19, 2023). Available at SSRN: https://ssrn.com/abstract=4060307 or http://dx.doi.org/10.2139/ssrn.4060307

Sean S. Cao

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Baozhong Yang (Contact Author)

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States
404-413-7350 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://sites.google.com/view/baozhongyang/

Alan L. Zhang

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

HOME PAGE: http://www.alanlzhang.com

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