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Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry

J. OF FINANCE, Vol. 51 No. 1, March 1996

Posted: 28 Jun 1998  

Keith C. Brown

University of Texas at Austin - Department of Finance

W. Van Harlow

Fidelity Investments

Laura T. Starks

University of Texas at Austin - Department of Finance

Abstract

We test the hypothesis that when their compensation is linked to relative performance, managers of investment portfolios likely to end up as "losers" will manipulate fund risk differently than those managing portfolios likely to be "winners." An empirical investigation of the performance of 334 growth-oriented mutual funds during 1976 to 1991 demonstrates that mid-year losers tend to increase fund volatility in the latter part of an annual assessment period to a greater extent than mid-year winners. Further, we show that this effect became stronger as industry growth and investor awareness of fund performance increased over time.

JEL Classification: G10

Suggested Citation

Brown, Keith C. and Harlow, W. Van and Starks, Laura T., Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry. J. OF FINANCE, Vol. 51 No. 1, March 1996. Available at SSRN: https://ssrn.com/abstract=7460

Keith C. Brown

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-6520 (Phone)
512-471-5073 (Fax)

W. Van Harlow

Fidelity Investments ( email )

82 Devonshire Street
Boston, MA 02109
United States
617-563-2673 (Phone)
617-476-9762 (Fax)

Laura T. Starks (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-5899 (Phone)
512-471-5073 (Fax)

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