Employment Risk, Compensation Incentives and Managerial Risk Taking: Evidence from the Mutual Fund Industry

Abstract

We examine the influence of employment risk and compensation incentives on managerial risk taking. Our empirical investigation of the risk taking behavior of equity fund managers during 1980 to 2003 shows that managerial risk taking crucially depends on the relative importance of these incentives. When employment risk is high, managers that lag behind tend to decrease risk relative to leading managers in order to prevent potential job loss. When employment risk is low, compensation incentives dominate and lagging managers increase risk in order to catch up with the winners.

Keywords: Managerial Risk Taking, Employment Risk, Compensation Incentives, Mutual Funds, Restrictions

JEL Classification: G23, M54