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Fund Flows, Performance, Managerial Career Concerns, And Risk Taking, Marco Pagani, P. Hu, J. Kale, A. Subramanian

Marco Pagani

We develop a unified model of the interactions among investors, fund companies, and fund managers.We show that the interplay between a manager's incentives from her compensation structure and career concerns leads to a nonmonotonic (approximately U-shaped) relation between her risk choices and prior performance relative to her peers. Significantly outperforming (underperforming) managers are less (more) likely to be fired in the future and are also more likely to increase relative risk. Ceteris paribus, relative risk declines with the level of employment risk faced by a manager. Using a large sample of mutual fund managers, we find strong support for the …