Regulatory Induced Herding? Evidence from Polish Pension Funds

Abstract

The paper documents herding among pension fund managers in Poland. Herding occurs despite the lack of an economically significant link between fund performance and the flow of new capital or members. To explain this phenomenon, the paper outlines a model that attributes herding to performance incentive contracts imposed by the authorities in Poland. The model shows that penalties for underperformance imposed by the regulator are likely to cause fund managers to follow each other's portfolio choices and pursue similar investment strategies. Since herding causes similar portfolio allocations by all funds, the results call for a reduction in the number of funds, or a review of the relative performance incentive system and current constraints on portfolio allocation. The latter could also help reduce the dominance of government bonds in investment portfolios of pension funds.

Keywords: pension funds, herding, portfolio choice

JEL Classification: G11, G23