human rights political instability and investment in south africa a note abstract this paper extends the model of fielding j dev econ 58 1999 405 which is designed to explain changes in investment in south africa during the apartheid period by allowing a role for indicators of political instability and political and civil rights as measured by fedderke et al fedderke j de kadt r luiz j 1999 indicators of political liberty property rights and political instability in south africa 1935 97 ersa working paper 4 university of the witwatersrand the conclusions based on estimation of the original model are robust to the inclusion of the political factors but these factors do explain some of the variation in investment over time

uncommon value the characteristics and investment performance of contrarian funds motivated by extant theories of herding behavior this paper empirically identifies contrarian mutual funds as those trading most frequently against the crowd we find that contrarian funds generate superior performance both when they trade against and with the herd indicating that they possess superior private information furthermore contrarians do not trade in a particularly correlated fashion with each other consistent with these funds having disparate information our fund level contrarian measure is largely unrelated to existing measures of fund strategy uniqueness as both contrarian and herding funds score highly on such measures building on our finding of superior alphas for contrarian funds we construct a stock level contrarian score that reflects the aggregate stock selection information possessed by contrarian managers this stock level contrarian score significantly predicts stock returns after controlling for measures of stock level herding as well as a battery of return predictive investment signals documented in prior studies this paper was accepted by wei jiang finance

relative performance incentives and price bubbles in experimental asset markets we study experimental markets in which participants face incentives modeled upon those prevailing in markets for managed funds each participant s portfolio is periodically evaluated at market value and ranked by relative performance as measured by short term paper returns those who rank highly attract a larger share of new fund inflows in an environment in which prices are typically close to intrinsic value the effect of these incentives is mild however in an environment in which markets are prone to bubble mispricing is greatly exacerbated by relative performance incentives and becomes even more pronounced with experience

incentive fees who wins who loses 1987 incentive fees who wins who loses financial analysts journal vol 43 no 1 pp 27 38

performance fee contract change and mutual fund risk abstract we examine the effect that an exogenously specifically governmentally required change in compensation contract had on a managerial decision we find that a group of mutual funds changed their portfolio risk levels after they were forced to change their performance fee schedules their portfolio risk choices differed predictably from a randomly selected group of nonperformance fee funds and a group of performance fee funds that were not required to change their compensation contracts in addition the affected mutual funds lost both shareholders and assets around the time of the imposition of the restriction while the other funds exhibited little change or gained assets and shareholders

portfolio performance evaluation old issues and new insights this article presents a model that provides insights about various measures of portfolio performance the model explores several criticisms of these measures these include the problem of identifying an appropriate benchmark portfolio the possibility of overestimating risk because of market timing ability and the failure of informed investors to earn positive risk adjusted returns because of increasing risk aversion the article argues that these need not be serious impediments to performance evaluation

investor behavior and the persistence of poorly performing mutual funds abstract recent studies tentatively suggest some mutual funds have near term persistent positive performance but reinforce earlier findings that other funds have long term persistent negative performance in this paper we ask how consistently underperforming mutual funds are able to persist nevertheless we compare two models one model incorporates the assumption that investors choose funds on the basis of past risk adjusted returns the other model motivated by the representativeness heuristic assumes investors react to recent returns without considering the predictive validity of returns our analysis of a sample of no load growth funds supports a model of investor behavior combining two extremes when choosing among funds investors respond to returns ignoring differences in systematic risk and expenses but upon choosing a fund they stick fast forsaking the sensitivity to returns displayed in evaluating funds

risk taking in contests and the role of carrots and sticks i introduction when individuals compete for promotions bonuses or other rewards tied to their relative performance ranking vis a vis other contestants competition is likely to drive not just work effort but where imperfect monitoring permits other choices at the contestants discretion in this article we ask how rank dependent compensation influences attitudes toward risk or the choice of variance of output when contestants have opportunities to influence this aspect of their output distribution unlike previous literature we assume that it is costly for contestants to alter the variance of output and that identical contestants simultaneously choose both the mean of their output distribution i e work effort and its variance our analysis emphasizes the importance of the number of players and symmetry or lack thereof of payoffs on contestants incentives we find that contestants will engage in risk seeking increasing the variance of their output distribution in contests among three or more players when the payoff structure offers a greater prize for ranking first than the penalty for ranking last as happens in winner take all contests if the tournament organizer or sponsor values the aggregate output of the contestants as is typically assumed in labor market tournaments this risk seeking behavior is inefficient because it is costly but does not increase the expected output however we argue that many contests such as the research and development tournaments first modeled by taylor 1995 may be characterized by an organizer who cares only or primarily about the highest output achieved by a single contestant e g the best submission received in such cases the organizer may benefit from costly risk taking among contestants we show that three payoff levels a prize to the contestant ranked first a penalty to the contestant ranked last and a common intermediate payoff to all others are sufficient to achieve any combination of effort and variance of output that the organizer wishes to induce among contestants so long as the desired output variance does not exceed that which results from a winner take all prize structure therefore the sponsor s problem can be characterized as choosing the optimal mean and variance of the output distribution given the contestants costs of influencing the mean and variance of output in this way our model provides an explanation for the importance of both carrots prizes and sticks penalties in competitive settings only through the combined use of both can a contest organizer determine the effort and the variance of output chosen by contestants and doing so is necessary to achieve optimal performance from contests since the pioneering work of lazear and rosen 1981 nalebuff and stiglitz 1983 o keeffe viscusi and zeckhauser 1984 and others rank order tournaments or contests have been used to model incentives in a variety of economic settings in particular executive compensation has frequently been modeled as a tournament in which low level executives are motivated by the prospect of climbing the corporate ladder and obtaining the large salaries attendant to top ranking executives as in rosen 1986 and bognanno 2001 similarly the behavior of investment fund managers who compete for top fund rankings has been modeled as a tournament by brown harlow and starks 1996 taylor 1995 developed a model of research tournaments in which contestants search for an innovation and the best innovation submitted to the sponsor wins a prize the distinguishing feature of a tournament or contest is that contestants are paid based on the rank of their output relative to others rather than the level of output prize levels are set in advance and competition to win generates the incentive to exert effort to increase output lazear and rosen 1981 showed that rank order tournaments can provide an efficient incentive framework in a labor market setting when workers are risk neutral

investors distraction and strategic repricing decisions in this paper i analyze investors reactions to changes in the expense ratios of equity mutual funds i show that investment flows response to fees cannot be fully explained by looking at investors performance sensitivity while performance sensitivity monotonically increases with past performance price sensitivity does not investors who buy top past performers seem to be distracted by the fund s previous return and pay relatively little attention to the expense ratios moreover price sensitivity increases with fund visibility while performance sensitivity decreases and while looking at data from 1986 to 2006 no discernible trend can be observed in the average performance sensitivity price sensitivity strongly increases due to the dramatic increase in the availability of mutual funds information for retail investors finally i show that investment companies strategically time their repricing decisions in order to exploit time variations in price and performance sensitivities and that fund governance quality affects the degree to which investment companies engage in this opportunistic behavior

fund manager herding a test of the accuracy of empirical results using u k data the portfolio holdings of 268 u k equity mutual funds are employed to test the accuracy of the lakonishok shleifer and vishny 1992 measure of herding and test for herding among u k mutual fund managers after adjusting for the biases in the lsv herding measure the results reveal the existence of a modest amount of fund manager herding in the largest and smallest individual u k stocks but little herding in other stocks or stocks aggregated by industry contrary to previous u s results we find that u k mutual fund managers tend to herd out of large stocks after high excess returns

performance incentive fees an agency theoretic approach this paper employs recent developments in agency theory to study the impact that com pensation contracts have on portfolio management investment decisions in a restricted mean variance world two types of incentive contracts for mutual fund managers are ana lyzed and compared the results show that the symmetric contract while not necessar ily eliminating agency costs dominates the bonus contract in aligning the manager s interests with those ofthe investor investment companies and by extension their managers control a large and increasing percentage ofthe aggregate wealth of their clients more investors are putting their money under the control of these advisers than ever before con sequently potential conflicts of interest arise between investment company own ers and their financial management advisers the securities and exchange com mission sec has been concerned with this issue for a number of years the agency has commissioned several studies to investigate the issue and has set forth certain rulings concerning the behavior of investment company advisers of par ticular importance has been the compensation arrangement between mutual fund management and the fund owners in fact the sec has issued specific guidelines regarding allowable fee schedules for managers these guidelines have ied to a policy debate concerning whether the sec has been too stringent or not stringent enough in regulating compensation for investment managers the present study takes a new approach to this problem in an attempt to resolve this debate the fiduciary relationship between mutual fund management and the inves tors they represent may be viewed as a principal agent relationship conse quently the methodology from the agency literature can be applied to study the impact of various compensation arrangements on the potential conflict of interest between these two groups

when in peril retrench testing the portfolio channel of contagion abstract the impact of past gains and losses on international investors risk aversion is an important factor in the propagation of financial shocks across countries we first present a stylized model illustrating how changes in investors risk aversion affect portfolio decisions and stock prices we then examine empirically the behavior of international mutual funds when funds returns are below average they reduce their exposure to countries in which they were overweight and vice versa an index of financial interdependence that reflects the extent to which countries share overexposed funds helps explain the pattern of stock market comovement across countries and the pattern of contagion during crises

tournament rewards and risk taking this article considers a lazear rosen tournament model where agents can influence both the spread of their output distribution risk taking and its mean the unique equilibrium induces excessive risk taking and a low level of effort by modifying the tournament to give the highest prize to the agent with the most moderate output a low level of risk taking and high level of effort can be sustained as an equilibrium the first result can be useful to understand the relative performance evaluation puzzle of executive compensation and the second result can be useful to understand puzzling workplace norms promoting mediocrity

risk taking in selection contests abstract we study contests where the strategic variable is the degree of risk taking rather than the amount of effort the selection efficiency of such contests is examined we show that the selection efficiency of a contest may be improved by limiting the competition in two ways by having a small number of contestants and by restricting contestant quality

men women and competition an experimental test of behavior this study reports a series of experiments that examine outcomes when agents are able to choose between a payment scheme that rewards based on absolute performance i e piece rate and a scheme that rewards based on relative performance i e a tournament we test for the presence and persistence of gender differences in performance and the rate of entry into the tournament option and whether these differences are sensitive to the structure of the tournament rewards in the winner take all wta condition only the best performer in the tournament for each round received a payment 4 50 in the graduated tournament condition the same payment 4 50 was divided among the first second and third finishers in the tournament in the wta condition men showed significantly lower forecast errors than women in addition a clear sorting effect occurs in the wta condition in early rounds of the wta condition male entrants into the tournament show significantly lower forecast errors than female tournament entrants however the difference disappears over time after controlling for forecasting skill gender did not predict entry into the tournament for the wta condition however lower forecasting skill reduced the probability of entry in the graduated tournament the situation was reversed men entered the tournament at significantly higher rates even after controlling for skill forecasting skill had no impact on the decision to enter the tournament while the average male entrant to the tournament had lower forecast errors than the average female entrant the men entered at much higher rates as a consequence men were much more likely than women to enter the tournament too frequently

optimal contracts in a continuous time delegated portfolio management problem this article studies the contracting problem between an individual investor and a professional portfolio manager in a continuous time principal agent framework optimal contracts are obtained in closed form these contracts are of a symmetric form and suggest that a portfolio manager should receive a fixed fee a fraction of the total assets under management plus a bonus or a penalty depending upon the portfolio s excess return relative to a benchmark portfolio the appropriate benchmark portfolio is an active index that contains risky assets where the number of shares invested in each asset can vary over time rather than a passive index in which the number of shares invested in each asset remains constant over time fund managers compensation schemes in a delegated portfolio management setting have been of special interest to both academics and practitioners academic interest stems in part from the rapid growth of managed funds over the last two decades gompers and metrick 1998 report that by december 1996 mutual funds pension funds and other financial intermediaries held discretional control over more than half of the u s equity market it is thus of importance to study the impact of institutional trading on asset prices and to integrate into one model both asset pricing and delegated portfolio management compensation as advocated by brennan 1993 allen and santomero 1997 and allen 2001 it is also important to understand the relationship between a manager s trading strategies and his implicit incentives or career concerns see e g brown harlow and starks 1996 brown goetzmann and park 1997 chevalier and ellison 1999 and chen and pennacchi 2000 these concerns include internal promotion from a small to a large fund higher outside offers and the flow of money through the fund under management 1 the importance of fund manager compensation is also underscored by congressional passage in 1970 of the amendment to

are n 1 heads better than one the case of mutual fund managers abstract recent studies find that mutual funds exhibit differential and persistent performance which is frequently attributed to superior managerial decision making we extend the literature by examining the impact of the fund s management structure on performance outcomes specifically we examine directly whether superior outcomes in terms of risk adjusted returns may be explained by behavioral decision making theory that asserts that teams make better decisions than individuals empirical results are consistent with the classical decision making theory and the efficient market hypothesis

cautious risk takers investor preferences and demand for active management actively managed mutual funds have distinct return distributions from their passive benchmarks and our theoretical analysis using tail sensitive risk preferences suggests that active value and growth funds may serve to reduce downside risk and capture upside potential respectively furthermore tail sensitivity measures estimated from the empirical pricing kernel have significant explanatory power for active fund flows even after controlling for business cycles and market wide sentiment finally active funds unlike their passive counterparts have exposures to option strategies hedging downside risk or capturing upside potential

rank matters the impact of social competition on portfolio choice tournament incentives schemes have been criticized for inducing excessive risk taking among financial market participants in this paper we investigate how relative performance based incentive schemes and status concerns for higher rank influence portfolio choice in laboratory experiments we find that both underperformers and over performers adapt their portfolios to their current relative performance preferring either positively or negatively skewed assets respectively most importantly these results hold both when relative performance is instrumental for higher payoffs in a tournament and when it is only intrinsically motivating and not payout relevant we find no effects when no relative performance information is given

cross sectional alpha dispersion and performance evaluation abstract our paper explores the link between cross sectional fund return dispersion and performance evaluation the foundation of our model is the simple intuition that in periods of high return dispersion which is associated with high levels of idiosyncratic risk for zero alpha funds unskilled managers can more easily disguise themselves as skilled rational investors should be more skeptical and apply larger discounts to reported performance in high dispersion environments our empirical results are consistent with this prediction using fund flow data we show that a one standard deviation increase in cross sectional return dispersion is associated with an 11 to 17 decline in flow performance sensitivity the effect is stronger for recent data and among outperforming funds

reprint of investors distraction and strategic repricing decisions abstract in this paper i analyze investors reactions to changes in the expense ratios of equity mutual funds i show that investment flows response to fees cannot be fully explained by looking at investors performance sensitivity while performance sensitivity monotonically increases with past performance price sensitivity does not investors who buy top past performers seem to be distracted by the fund s previous return and pay relatively little attention to the expense ratios moreover price sensitivity increases with fund visibility while performance sensitivity decreases and while looking at data from 1986 to 2006 no discernible trend can be observed in the average performance sensitivity price sensitivity strongly increases due to the dramatic increase in the availability of mutual funds information for retail investors finally i show that investment companies strategically time their repricing decisions in order to exploit time variations in price and performance sensitivities and that fund governance quality affects the degree to which investment companies engage in this opportunistic behavior

modifying variability and correlations in winner take all contests we consider contests with a fixed proportion of winners based on relative performance special attention is paid to winner take all contests which we define as contests with relatively few winners receiving relatively large awards but we consider the full range of values of the proportion of winners if a contestant has the opportunity to modify the distribution of her performance what strategy is advantageous when the proportion of winners is less than one half a riskier performance distribution is preferred when this proportion is greater than one half it is better to choose a less risky distribution using a multinormal model we consider modifications in the variability of the distribution and in correlations with the performance of other contestants increasing variability and decreasing correlations lead to improved chances of winning when the proportion of winners is less than one half and the opposite directions should be taken for proportions greater than one half thus it is better to take chances and to attempt to distance oneself from the other contestants i e to break away from the herd when there are few winners a more conservative herding strategy makes sense when there are many winners our analytical and numerical results indicate that the probability of winning can change substantially as variability and or correlations are modified furthermore in a game theoretic setting in which all contestants can make modifications choosing a riskier less risky performance distribution when the proportion of winners is low high is the dominant best response strategy we briefly consider some practical issues related to the recommended strategies and some possible extensions

how are derivatives used evidence from the mutual fund industry we investigate investment managers use of derivatives by comparing return distributions for equity mutual funds that use and do not use derivatives in contrast to public perception derivative users have risk exposure and return performance that are similar to nonusers we also analyze changes in fund risk in response to prior fund performance changes in risk are substantially less severe for funds using derivatives consistent with the explanation that managers use derivatives to reduce the impact of performance on risk we provide new evidence regarding the implications of cash flows and managerial gaming for the relation between performance and risk

religious beliefs gambling attitudes and financial market outcomes this study investigates whether geographic variation in religion induced gambling norms affects aggregate market outcomes we conjecture that gambling propensity would be stronger in regions with higher concentrations of catholics relative to protestants consistent with our conjecture we show that in regions with higher catholic protestant ratios investors exhibit a stronger propensity to hold lottery type stocks broad based employee stock option plans are more popular the initial day return following an initial public offering is higher and the magnitude of the negative lottery stock premium is larger collectively these results indicate that religion induced gambling attitudes impact investors portfolio choices corporate decisions and stock returns

costly search and mutual fund flows this paper studies the flows of funds into and out of equity mutual funds consumers base their fund purchase decisions on prior performance information but do so asymmetrically investing disproportionately more in funds that performed very well the prior period search costs seem to be an important determinant of fund flows high performance appears to be most salient for funds that exert higher marketing effort as measured by higher fees flows are directly related to the size of the fund s complex as well as the current media attention received by the fund which lower consumers search costs

bounds on the welfare loss from moral hazard with limited liability we study a principal agent problem with discrete outcome and effort level spaces the principal and the agent are risk neutral and the latter is subject to limited liability quantifying welfare loss as the ratio between the first best social welfare and that arising from the principal s optimal pay for performance contract we provide simple parametric bounds for problem instances with moral hazard relying on that we compute the worst case welfare loss ratio among all problem instances with a fixed number of effort and outcome levels as a function of the number of possible effort levels and the likelihood ratio evaluated at the highest outcome as extensions we look at linear contracts and at cases with multiple identical tasks our work constitutes an initial attempt to quantify the losses arising from moral hazard when the agent is subject to limited liability and shows that these losses are non negligible in the worst case

incentives between firms and within this paper reviews the significant progress in agency theory i e the economic theory of incentives during the 1990s with an eye toward applications to supply transactions i emphasize six recent models in three pairs 1 new foundations for the theory of incentive contracts 2 new directions in incentive theory and 3 new applications to supply transactions by reviewing these six models i hope to establish three things first the theory of incentive contracts needed and received new foundations second new directions in incentive theory teach us that incentive contracts are not the only source of incentives finally and especially relevant to supply transactions the integration decision is an instrument in the incentive problem

payoff complementarities and financial fragility evidence from mutual fund outflows the paper provides empirical evidence that strategic complementarities among investors generate fragility in financial markets analyzing mutual fund data we find that consistent with a theoretical model funds with illiquid assets where complementarities are stronger exhibit stronger sensitivity of outflows to bad past performance than funds with liquid assets we also find that this pattern disappears in funds where the shareholder base is composed mostly of large investors we present further evidence that these results are not attributable to alternative explanations based on the informativeness of past performance or on clientele effects we analyze the implications for funds performance and policies

window dressing by pension fund managers this paper takes a first look at investment strategies of managers of 769 pension funds with total assets of 129 billion at the end of 1989 the data show that managers of these funds tend to oversell stocks that have performed poorly relative sales of losers accelerate in the fourth quarter when funds portfolios are closely examined by the sponsors this result supports the view that fund managers window dress their portfolios to impress sponsors and suggests that managers are evaluated on their individual stock selections and not just aggregate portfolio performance this abstract was borrowed from another version of this item

boundaries of the tournament pricing effect in asset markets evidence from experimental markets 1 introduction when traders in experimental asset markets are compensated according to a tournament contract a salary plus bonus scheme in which a trader s bonus is proportional to the amount by which that trader exceeds the average performance in that market we observe violation of convergence results obtained in experiments that did not use such compensation schemes this effect of tournament incentives has been documented by james and isaac 2000 in this paper we search for what smith and williams 1990 have termed the boundaries of falsification for the proposition that tournament contracts affect asset market prices specifically we examine the robustness of the tournament pricing effect on market prices on several fronts first we ask whether the pricing effect survives when not all traders are being compensated according to the beat the market contract second we ask whether the tournament pricing effect is robust with respect to perturbations in the trader s compensation contract third we ask whether the pricing effect is observed in two period asset life markets hereafter 2 p a l markets as it is in 15 period asset life markets hereafter 15 p a l markets 1 section 2 presents the background of the current experiments the research conjectures and the experimental design the experimental results are contained in section 3 section 4 discusses a phenomenon that we had not encountered until these experiments section 5 offers the conclusions and thoughts for further reflection 2 conjectures and experimental design background james and isaac 2000 was the first paper to assess the effect on asset market prices of tournament contracts imposed at the individual level this is distinct from an earlier paper by brown harlow and starks 1996 that examines how individual portfolio managers allocation decisions change in response to such contracts but that does not address the issue of any effects on prices of the assets the portfolio managers are trading brown harlow and starks is itself a specific application of a wider literature on using tournament contracts to address principal agent conflicts see also nalebuff and stiglitz 1983 bull schotter and weigelt 1987 and ehrenburg and bognanno 1990 the issue of the effect on market prices is arguably the most important one surrounding the imposition of tournament contracts on portfolio managers because it is these capital market prices that help allocate savings to different forms of investment naturally misleading capital market prices can potentially lead to catastrophically misdirected capital spending 2 this key aspect of james and isaac that it addresses the effect at the market level of using tournament incentives at the individual level is also present in this paper the research objective of this paper is to document the eventual market level ramifications of varying the use of tournament contracts the nature of those variations will be discussed here the effect of tournament incentives on asset market prices prior to this paper it has been established that the way in which traders in experimental asset markets are compensated on an individual basis can significantly change the prices that eventuate at the market level in a seminal paper on experimental asset markets smith suchanek and williams 1988 hereafter ssw find that as groups of traders were called back for repeat sessions of a 15 p a l market which can be viewed as an experimental implementation of the theoretical market analyzed by tirole 1982 the market price of the asset bubbled less in each successive 15 period asset market this suggests that the no trading common expectations equilibrium derived by tirole might be reached eventually but requires experience on the part of the pool of traders of note in ssw the traders are compensated such that an experimental dollar corresponds to a u s dollar that is the traders respective experimental dollar holdings deriving variously from cash endowments dividend payments and capital gains are translated one for one into u

the provision of incentives in firms i ncentives are the essence of economics despite many wide ranging claims about their supposed importance there has been little empirical assessment of incentive provision for workers the purpose of this paper is to critically overview existing work on the provision of incentives since the interests of workers and their employers are not always aligned a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm s interest this literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers these include piece rates options discretionary bonuses promotions profit sharing efficiency wages deferred compensation and so on my objective here is to evaluate this literature in the light of a growing empirical literature on compensation where possible i will address the literature from two perspectives first an underlying assumption of this literature is that individuals respond to contracts that reward performance accordingly i consider whether agents behave in this way and whether these responses are always in the firm s interest second i address whether firms write contracts with these responses in mind in other words do contracts look like the predictions of the theory incentives are provided to workers

difference in interim performance and risk taking with short sale constraints abstract absent much theory empirical works often rely on the following informal reasoning when looking for evidence of a mutual fund tournament if there is a tournament interim winners have incentives to decrease their portfolio volatility as they attempt to protect their lead while interim losers are expected to increase their volatility so as to catch up with winners we consider a rational model of a mutual fund tournament in the presence of short sale constraints and find the opposite interim winners choose more volatile portfolios in equilibrium than interim losers several empirical works present evidence consistent with our model however based on the above informal argument they appear to conclude against the tournament behavior we argue that this conclusion is unwarranted we also demonstrate that tournament incentives lead to differences in interim performance for otherwise identical managers and that mid year trading volume is inversely related to mid year stock return

management compensation and market timing under portfolio constraints abstract this paper shows that portfolio constraints have important implications for management compensation and performance evaluation in particular in the presence of portfolio constraints allowing for benchmarking can be beneficial benchmark design arises as an alternative effort inducement mechanism vis a vis relaxing portfolio constraints numerically we solve jointly for the manager s linear incentive fee and the optimal benchmark the size of the incentive fee and the risk adjustment in the benchmark composition are increasing in the investor s risk tolerance and the manager s ability to acquire and process private information

myopic risk taking in tournaments abstract there is a common notion that incentive schemes in the financial industry trigger myopia and risk taking in some sense this contrasts with the concept of myopic loss aversion mla which implies that myopia mitigates risk taking a number of experimental studies support the mla hypothesis by showing that people take less risk the more frequently their investments are evaluated in this paper we show experimentally that if subjects are exposed to tournament incentives the standard mla effect disappears rather there is a tendency towards more risk taking the more frequently investments are evaluated

institutions and the turn of the year effect evidence from actual institutional trades abstract using a large proprietary database of institutional trades we investigate whether institutional investors drive the turn of the year toy effect institutions that engage in window dressing tax loss selling or risk shifting will contribute to the toy effect by selling small poorly performing stocks at the end of december and or buying those same stocks at the beginning of january we find abnormal pension fund selling in small stocks with poor past performance during the final trading days in december providing some support for the window dressing hypothesis however we find little evidence that institutional tax loss selling or risk shifting trading strategies contribute to toy returns furthermore stocks with no institutional trading around the year end exhibit considerably stronger toy return patterns than stocks in which institutions trade taken together our results suggest that institutions play a limited role in driving the toy effect

adverse risk incentives and the design of performance bases contracts this paper uses option pricing theory to value and analyze many performance based fee contracts that are currently in use a potential problem with some of these contracts is that they may induce portfolio managers to adversely alter the risk of the portfolios they manage the paper is prescriptive in that it presents conditions for contract parameters that provide proper risk incentives for classes of investment strategies for buy and hold and rebalancing strategies adverse risk incentives are avoided when the penalties for poor performance outweigh the rewards for good performance

rewarding trading skills without inducing gambling this paper develops a model of active portfolio management in which fund managers may secretly gamble in order to manipulate their reputation and attract more funds we show that such trading strategies may expose investors to severe losses and are more likely to occur when fund managers are impatient their trading skills are scalable and generate higher prot per unit of risk we study investment management contracts that deter this behavior if investors are short lived then the manager must leave rents to investors in order to credibly commit not to gamble if investors are long lived contracts that increase but defer expected bonuses after an outstanding performance implement the rstbest our model can explain a number of observed dierences

contracting to compete for flows abstract we present a model in which asset managers design their contracts to attract flows of investor capital we find that they make their contracts depend on public information e g credit ratings or benchmark indices as a way to attract flows rather than as a way to mitigate incentive problems as has been emphasized in the literature unfortunately asset managers competition for flows triggers a race to the bottom asset managers use public information in their contracts even though it is socially inefficient this inefficiency arises because contracting on public information prevents risk sharing

estimation risk and incentive contracts for portfolio managers the fiduciary relationship between portfolio managers and the investors they represent may be viewed as a principal agent relationship and therefore we have used the methodology from the agency literature in economics and finance to study the impact of existing compensation arrangements on the conflicts of interest between these two groups in this paper we employ the assumptions of the capital asset pricing model and of estimation risk concerning beta to develop a model in which portfolio managers can through effort choose the parameters of the beta distribution our model entails moral hazard because the investor cannot observe the manager s action given certain utility functions we show that the presence of estimation risk leads the manager to choose a lower beta portfolio than otherwise and that no first best optimal contract exists we also show that managerial divergent behavior is related to the divergence in risk preferences between the manager and the investor by making slightly more stringent assumptions about preferences we show that there exist some conditions under which the manager will provide more effort but also a riskier portfolio than the investor prefers finally we show that the investor will prefer a manager who is less risk averse than the investor

the dynamics of short term mutual fund flows and returns a time series and cross sectional investigation abstract this study analyzes the dynamics of daily mutual fund flows a vector auto regression var of flows and returns shows that the behavior of fund investors is more consistent with contrarian rather than momentum characteristics past fund flows have a positive impact on future fund returns with the long term information effect dominating the transient price pressure effect seasonality in daily flows such as day of week and day of month patterns are present and daily flows are generally mean reverting probit regressions indicate that fund investment objective marketing policy and level of active management explain cross sectional variation in the behavioral patterns displayed in daily flows our results are robust to the different methods of calculating daily flows based on whether or not the day end tna figures include the current day s flow throughout the analysis we contrast the dynamics of daily flows with established results for monthly fund flows and find important differences between the two

expense ratios of north american mutual funds the average expense ratio paid by canadian mutual fund investors is 50 higher than that paid in the united states this discrepancy is commonly thought to exist because canadian funds do not take advantage of economies of scale and have less competition a monopolistic competition framework is used to develop a model for the mutual fund industry by allowing each fund to have different attributes the model permits funds to charge different expense ratios in equilibrium and is found to strongly fit the north american mutual fund market empirical analysis indicates that these two common explanations and measurable fund attributes account for 24 of the discrepancy jel classification l11 l13 and g15 les ratios de depenses des fonds mutuels nord americains le taux moyen de depenses payees par les investisseurs canadiens dans les fonds mutuels sont de 50 plus elevees que celles qu on paie aux etats unis cet ecart est attribued habitude au fait que les fonds canadiens ne tirent pas profit des economies d echelle et qu il y a moins de concurrence au canada on utilise un modele de concurrence monopolistique pour analyser l industrie des fonds mutuels en permettant achaque fond d avoir certains attributs le modele permet aux fonds de charger des taux de depenses differents en equilibre il semble que cela corresponde aux caracteristiques du marchedes fonds mutuels americains une analyse empirique montre que les deux explications usuelles et les attributs mesurables des fonds expliquent 24 de l ecart

incentive fees some problems and some solutions 1987 incentive fees some problems and some solutions financial analysts journal vol 43 no 1 pp 21 26

does option compensation increase managerial risk appetite this paper solves the dynamic investment problem of a risk averse manager compensated with a call option on the assets he controls under the manager s optimal policy the option ends up either deep in or deep out of the money as the asset value goes to zero volatility goes to infinity however the option compensation does not strictly lead to greater risk seeking sometimes the manager s optimal volatility is less with the option than it would be if he were trading his own account furthermore giving the manager more options causes him to reduce volatility managers with convex compensation schemes play an important role in financial markets this paper solves for the optimal dynamic investment policy for a risk averse manager paid with a call option on the assets he controls the paper focuses on how the option compensation impacts the manager s appetite for risk when he cannot hedge the option position on one hand the convexity of the option makes the manager shun payoffs that are likely to be near the money under the optimal policy the manager either significantly outperforms his benchmark or else incurs severe losses furthermore in examples of optimal trading strategies asset volatility goes to infinity as asset value goes to zero yet option compensation does not strictly lead to greater risk seeking as asset value grows large or if the evaluation date is far away the manager moderates asset risk for example if the manager has constant relative risk aversion crra asset volatility converges to the merton constant as asset value goes to infinity in some situations the manager actually chooses a lower asset volatility than he would if he were investing on his own because the leverage inherent in his option magnifies his exposure to the asset volatility in addition with all constant or decreasing absolute risk averse utility functions from the hyperbolic absolute risk averse hara class giving the manager more options causes him to reduce asset volatility in the crra case for example the manager targets a fixed volatility for his personal

iso risk an analysis of risk taking in fixed income markets we test the hypothesis that portfolio managers trade off variance and kurtosis in asset returns we find empirical evidence that supports the iso risk hypothesis using fixed income mutual fund data

bank stability and managerial compensation abstract we investigate the relationship between insolvency risk and executive compensation for bhcs over the 1992 2008 period we employ ceo compensation sensitivity to risk vega and pay share inequality between the ceo and other executives as measures of compensation and employ a system model to account for the endogeneity problem between vega and risk five main results are obtained first ceo compensation sensitivity to risk of bhcs has risen in response to deregulation to resemble those of the industrial firms second higher vegas lead to greater bank instability third the association between bank stability and managerial compensation is bi directional higher vegas induce greater risk and vice versa fourth bhcs in the next to the largest size group increase ceo vegas the most and have the strongest potential to create instability fifth increased pay share inequality has effects opposite to those of the increase in vega greater pay share inequality is associated with greater stability

portfolios in disguise window dressing in bond fund holdings abstract this paper builds on the limited body of research on window dressing by bond mutual funds our monthly bias free sample allows us to undertake a more comprehensive study than is possible with the quarterly data traditionally employed in otherwise similar studies we test window dressing in a straightforward manner using monthly undisclosed portfolios which makes it possible to compare changes in public debt allocations around quarterly disclosures our results support the hypothesis that window dressing patterns vary with market conditions we also conduct thorough tests that indicate the significant influence of fund size on window dressing individual analyses provide evidence that this cosmetic practice is not a widespread behaviour in the spanish bond fund industry

mutual fund tournaments the sorting bias and new evidence previous findings regarding the risk shifting behavior of mid year underperforming mutual fund managers are mixed in this article i show that this is due to a sorting bias which is caused by the sorting of first half risk levels when establishing relative mid year performance even without risk shifting behavior mean reversion of these sorted risk levels results in the detection of tournament behavior after correcting for this bias i find evidence supporting the hypothesis that first half underperforming managers increase portfolio risk during the second half of the year and that this tournament behavior is not dependent on first half market conditions the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

ranking games and gambling when to quit when you re ahead it is common for rewards to be given on the basis of a rank ordering so that relative performance amongst a cohort is the criterion in this paper we formulate an equilibrium model in which an agent makes successive decisions on whether or not to gamble and is rewarded on the basis of a rank ordering of the final position amongst competing players one application of this model is to the behavior of mutual fund managers who are paid depending on funds under management which in turn are greatly influenced by annual or quarterly rank orderings our model deals with a situation in which fund managers can elect either to pick stocks or to use a market tracking strategy in equilibrium the distribution of the final position will have a negative skew we explore how this distribution depends on the number of players the probability of success when gambling the structure of the rewards and on information regarding the performance of other players

how does illiquidity affect delegated portfolio choice in response to how they are compensated mutual fund managers who are underperforming by mid year are likely to increase the risk of their portfolios toward the year end we argue that an increase in the liquidity of the stocks that managers use to shift risk can lead to an increase in the size of their risky bets this in turn hurts fund investors by increasing the costs of misaligned incentives associated with delegated portfolio management we provide both theoretical and empirical results that are consistent with this argument we use decimalization as an exogenous shock to liquidity to identify causal effects

delegated portfolio management a survey of the theoretical literature abstract this paper provides a selective review of the theoretical literature on delegated portfolio management as a principal agent relationship the main focus of the paper is to review the analytical issues raised by the peculiar nature of the delegated portfolio management relationship within the broader class of principal agent models in particular the paper discusses the performance of linear versus nonlinear compensation contracts in a single period setting the possible effects of limited liability of portfolio managers the role of reputational concerns in a multiperiod framework and the incentives to noise trading in addition the paper deals with some general equilibrium dimensions and asset pricing implications of delegated portfolio management the paper also suggests some directions for future research

a few bad apples scandalous behavior of mutual fund managers recent scandals in the business world have intensified the demand for an explanation of the causes of corporate wrongdoing this study empirically tests the effects of mutual fund management fees and control structures on the likelihood of illegal activity within mutual fund organizations specific attention is given to the presence of agency duality issues in the mutual fund industry and how this influences the motivations and decisions of fund managers findings provide support for the hypothesized relationship that higher levels of management fees decrease the likelihood of illegal behavior additionally control of the mutual fund by external management is found to have a negative impact on the likelihood of illegal activity while also acting as a moderator of the management fee illegal behavior relationship

climate tipping and economic growth precautionary capital and the price of carbon the optimal reaction to a climate tipping point that becomes more imminent with global warming is to be precautionary in adjusting capital to prepare for the calamity and to price carbon to make catastrophic change less imminent the saving response can be positive or negative if the mean lag for the impact of the catastrophe is long enough the saving response will be negative because the precautionary return in the keynes ramsey rule becomes negative we also show the separate effects of the elasticity of intertemporal substitution eis and the relative risk aversion rra using duffie epstein preferences focusing on a productivity catastrophe we calibrate our model and show how sensitive the policy responses are to the degrees of eis and rra the trend rate of economic growth the hazard rate and how long it takes for the catastrophe to have its full impact

tournament behavior in hedge funds high water marks fund liquidation and managerial stake we analyze whether risk shifting by a hedge fund manager is related to the manager s incentive contract personal capital stake and the risk of fund closure we find that the propensity to increase risk following poor performance is significantly weaker when incentive pay is tied to the fund s high water mark and when funds face little immediate risk of liquidation risk shifting is also less prevalent when a manager has a significant amount of personal capital invested in the fund overall high water mark provisions managerial stake and low risk of fund closure appear to make a hedge fund manager more conservative with regard to risk shifting

disclosure and agency conflict evidence from mutual fund commission bundling abstract this study provides empirical evidence on the role of disclosure in resolving agency conflicts in delegated investment management for certain expenditures fund managers have alternative means of payment which differ greatly in their opacity payments can be expensed relatively transparent or bundled with brokerage commissions relatively opaque we find that the return impact of opaque payments is significantly more negative than that of transparent payments moreover we find a differential flow reaction that confirms the opacity of commission bundling collectively our results demonstrate the importance of transparency in addressing agency costs of delegated investment management

mutual fund volatility timing and management fees this paper shows that compensation incentives partly drive fund managers market volatility timing strategies larger incentive management fees lead to less counter cyclical or more pro cyclical volatility timing but fund styles or aggregate fund flows could also account for this relation therefore we control for them and find that the relation between fees and volatility timing still holds results show that less aggressive fund styles are associated with pro cyclical volatility timing and that volatility timing and flow timing are negatively related we also find that pro cyclical timing mostly improves funds average excess returns sharpe ratios and alphas

equilibrium prices in the presence of delegated portfolio management abstract this paper analyzes the asset pricing implications of commonly used portfolio management contracts linking the compensation of fund managers to the excess return of the managed portfolio over a benchmark portfolio the contract parameters the extent of delegation and equilibrium prices are all determined endogenously within the model we consider symmetric fulcrum performance fees distort the allocation of managed portfolios in a way that induces a significant and unambiguous positive effect on the prices of the assets included in the benchmark and a negative effect on the sharpe ratios asymmetric performance fees have more complex effects on equilibrium prices and sharpe ratios with the signs of these effects fluctuating stochastically over time in response to variations in the funds excess performance

risk taking behavior in mutual fund tournaments abstract we develop a two period model of a brown et al j finance 51 1996 85 mutual fund tournament in which two fund managers with unequal midyear performances compete for new cash inflows when one of the managers is an exogenous benchmark winning managers index and losing managers gamble however when both managers are active the winning manager is more likely to gamble expecially when the midyear performance gap is high or when stocks offer high returns and low volatility empirical evidence that winning managers gamble has been documented by other researchers but it has been interpreted as evidence against the tournament model with a dataset of weekly returns from 1984 to 1996 for 660 mutual funds we text for other tournament effects predicted by the model our results suggest a role for the theory of tournaments in studies of mutual fund behavior

why do fund managers increase risk abstract this paper examines the relationship between the increase in fund risk and subsequent cash flows we attempt to test the hypothesis that an increase in fund risk actually increases the net flows of equity funds which is a basic assumption of risk shifting we find that a change in fund risk has a positive and convex relationship with the fund s net flows the effect of risk changes on net flows is a natural consequence of its effects on inflows and outflows this paper s empirical results are robust to return frequency fund age and fund size our findings create incentives for managers to shift risk as documented in the mutual fund literature

do option like incentives induce overvaluation evidence from experimental asset markets abstract one potential reason for bubbles evolving prior to the financial crisis was excessive risk taking stemming from option like incentive schemes in financial institutions by running laboratory asset markets we investigate the impact of option like incentives on price formation and trading behavior the main results are that i we observe significantly higher market prices with option like incentives than linear incentives ii we further find that option like incentives provoke subjects to behave differently and to take more risk than subjects with linear incentives iii we finally show that trading at inflated prices is rational for subjects with option like incentives since it increases their expected payout

incidence and consequences of risk taking behavior in tournaments evidence from the nba we empirically explore the relevance and efficiency of risk taking behavior in tournaments we use data from the national basketball association nba and measure risk taking by the fraction of three point shots in basketball games we examine how point differences between teams during games affect their subsequent risk taking behavior it is found that teams that are trailing are more likely to increase their use of three point shots we additionally analyze the consequences of this change in behavior enhanced risk taking is inefficient in the vast majority of cases and is only beneficial if a team is trailing by a rather large margin we discuss possible explanations for these decision errors jel m5 d81 j30

the making of an investment banker stock market shocks career choice and lifetime income i show that stock market shocks have important and lasting effects on the careers of mbas stock market conditions while mba students are in school have a large effect on whether they go directly to wall street upon graduation further starting on wall street immediately upon graduation causes a person to be more likely to work there later and to earn on average substantially more money the empirical results suggest that investment bankers are largely made by circumstance rather than born to work on wall street

optimal asset allocation and risk shifting in money management this article investigates a fund manager s risk taking incentives induced by an increasing and convex relationship of fund flows to relative performance in a dynamic portfolio choice framework we show that the ensuing convexities in the manager s objective give rise to a finite risk shifting range over which she gambles to finish ahead of her benchmark such gambling entails either an increase or a decrease in the volatility of the manager s portfolio depending on her risk tolerance in the latter case the manager reduces her holdings of the risky asset despite its positive risk premium our empirical analysis lends support to the novel predictions of the model

portfolio rebalancing and the turn of the year effect this paper finds that for the 1935 1986 period the market s risk return relation does not have a january seasonal the findings differ from those of other studies due to the use of value weighted rather than equally weighted portfolios inferences are sensitive to the weighting procedure because of the small firm return patterns in january in particular even in those januaries for which the market return is negative small firm returns are positive and they are more positive the higher is beta this is consistent with the portfolio rebalancing explanation of the turn of the year effect since at least 1926 the average return on small firms in january has been unusually high a phenomenon known as the turn of the year effect in this paper we present new evidence regarding the risk return characteristics of small firms in january we find that for small firms there is a positively sloped riskreturn relation in both up and down markets this pattern is difficult to reconcile with the belief that the high return on small firms in january is equilibrium compensation for risk bearing we show how these patterns in small firms returns have led others to conclude that the market s risk return relation has a january seasonal in particular rozeff and kinney 21 and tinic and west 22 23 among others using equally weighted portfolios formed on the basis of historical betas have found a steeper slope for the capm s risk return relation in january than in other months we demonstrate that this pattern exists only for small firms consequently statistical inferences about the risk return relation are heavily dependent upon whether equally weighted or value weighted portfolio returns are used in the estimation we show that for 1935 86 when monthly cross sectional regressions are estimated using value weighted portfolio returns there is no more of a statistically significant difference in the estimated return to risk bearing in january than in the other eleven months of the year the notion that there is a january seasonal in the capm s risk return relation for the us has rapidly become accepted knowledge for example corhay hawawini and michel 6 accept this conclusion and investigate whether other

do tournaments have incentive effects much attention has been devoted to studying models of tournaments or situations in which an individual s payment depends only on his or her output or rank relative to that of other competitors academic interest derives from the fact that under certain sets of assumptions tournaments have desirable normative properties because of the incentive structures they provide our paper uses nonexperimental data to test whether tournaments actually elicit effort responses we focus on professional golf tournaments because information on the incentive structure prize distribution and measures of individual output players scores are both available we find strong support for the proposition that the level and structure of prizes in pga tournaments influence players performance

investment decisions depend on portfolio disclosures a weekly database of retail money fund portfolio statistics is uneconomical for retail investors to observe so it allows direct comparison of disclosed and undisclosed portfolios this makes possible a more direct and unambiguous test for window dressing than elsewhere in the literature the analysis shows that funds allocating between government and private issues hold more in government issues around disclosures than at other times consistent with the theory that intermediaries prefer to disclose safer portfolios cross sectional comparisons locate the most intense rebalancing in the worst recent performers money managers are typically required to disclose their portfolios on prearranged dates whether investors receive new information depends on whether managers are influenced by the disclosure requirement managers can ignore the disclosure schedule when they invest in which case the disclosed portfolios will be unbiased albeit noisy estimates of their investing strategies alternatively they can plan their investing around the schedule by moving briefly into and out of the portfolios they prefer to disclose thereby reducing or destroying the power of the disclosures to reveal anything meaningful the goal of this paper is to establish which scenario best describes the behavior of money market mutual fund managers the idea that portfolio weights interact with disclosure dates surfaces now and again in the academic and trade literature surviving on circumstantial evidence rather than direct observation the odd behavior of asset prices around common disclosure dates particularly the end of the year comprises

incentives in organizations n 1975 steven kerr published on the folly of rewarding a while hoping for b the argument was simple you get what you pay for kerr distilled this unifying theme from a disparate set of examples involving politicians soldiers doctors orphanage directors professors and students as well as manufacturing and clerical employees and even human resource managers from these examples kerr pp 77980 concluded that two main causes of distorted incentives are fascination with an objective criterion where individuals seek to establish simple quantifiable standards against which to measure and reward performance and overemphasis on highly visible behaviors when some parts of the task are highly visible while others are not it took agency theory 15 years to express kerr s title not to mention to evaluate or extend his conclusions during this period agency theory was obsessed with the tradeoff between incentives and insurance even though clear eyed observations like kerr s about the design and performance of real incentive contracts suggested that several other issues are at least as important fortunately recent work has brought agency theory not only to kerr s position but beyond in this paper i summarize four new strands in agency theory that help me think about incentives in real organizations as a point of departure i begin with a quick sketch of the classic agency model i then discuss static models of objective performance measurement that sharpen kerr s argument repeated game models of subjective performance assessments incentives for skill development rather than simply for effort and incentive contracts between versus within organizations i con

tournament incentives and asset price bubbles evidence from a field experiment abstract in this note we show at the example of an experimental stock market conducted on the occasion of the world soccer championship 2010 in south africa how tournament incentives might contribute to the formation of asset price bubbles

brothers from different mothers how distribution fees change investment behavior abstract we ask whether loads affect investment flows in the us mutual fund industry we argue that sales fees make the investment decision partially irreversible under these circumstances investors await for a stronger signal of managerial ability before committing to a new fund this stronger signal can take the form of a particularly strong performance or a particularly long series of positive performance realizations looking at pairs of fund shares with the same portfolio but different sales fee arrangements we show that investment flows in share classes with front loads react disproportionally to good performances higher convexity in the flow performance relationship and react to performance realizations further back in time longer memory a counterfactual example of fund shares with back end loads allows us to rule out the hypothesis that this behavior is due to the incentive structure of brokers finally we show that these behavioral modifications induced by front loads have a negative and significant effect on investors timing ability

of tournaments and temptations an analysis of managerial incentives in the mutual fund industry 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 furthermore we show that this effect became stronger as industry growth and investor awareness of fund performance increased over time

changes to mutual fund risk intentional or mean reverting an empirical issue is whether a mutual fund s change in intertemporal risk is intentional or arises from risk mean reversion our methodology uses actual fund trades to identify funds that actively change risk funds that are statistically identified as trading to change return variance or tracking error variance do not exhibit risk mean reversion mostly funds trade to reduce risk and in particular tracking error variance this is most evident for funds that previously attained a low tracking error variance we find no evidence of a relation between past performance and intended changes to return variance or tracking error variance

investor attrition and fund flows in mutual funds we explore the properties of equity mutual funds that experience a loss of assets after poor performance we document that both inflows and outflows are less sensitive to performance because performance sensitive investors leave or decide not to invest after bad performance consistent with the idea that attrition measures the sorting of performance sensitive investors we find that attrition has less of an impact on the fund s flow performance sensitivity for institutional funds where there is less dispersion in investor performance sensitivity also attrition has no effect on the flow performance sensitivity when attrition arises after good performance or investors invest for nonperformance reasons

on relative performance contracts and fund manager s incentives abstract for pension schemes mutual funds banks and other financial intermediaries large portfolio decisions are increasingly delegated to fund managers recently there has been growing concern that these managers seem to adopt extremely similar investment strategies one possible explanation for this phenomenon may be found in reward schemes based on relative performance we show how relative performance reward schemes may arise as optimal contracts our focus is the fund owners fund manager relationship in which the manager before making a portfolio decision on behalf of the owners may acquire at some cost information that is not available to the owners payment schemes based on relative performance afford the owners tighter control of their manager s activities however if two managers of different funds both accept contracts that depend on their relative as well as absolute performances then there may exist equilibria in the managers subgame that result in undesirable outcomes for the owners

inequality and risk taking behaviour this paper investigates social in uences on attitudes to risk and ofiers an evolutionary explanation of risk taking by young low ranked males becker murphy and werning 2005 found that individuals about to participate in a status tournament may take fair gambles even though they are risk averse in both wealth and status here their model is generalised by use of the insight of hopkins and kornienko 2010 that in a tournament or status competition one can consider equality in terms of the status or rewards available as well as in initial endowments while becker et al found that risk taking is increasing in the equality of initial endowments it is found here that it is increasing in the inequality of rewards in the tournament further it is shown that the poorest will be risk loving if the lowest level of status awarded is su ciently low thus the disadvantaged in society rationally engage in risky behavior when social rewards are su ciently unequal finally as greater inequality in terms of social status induces gambling it can cause greater inequality of wealth

institutional investors and long term investment evidence from chile developing countries are trying to develop long term financial markets and institutional investors are expected to play a key role this paper uses unique evidence on the universe of institutional investors from the leading case of chile to study to what extent mutual funds pension funds and insurance companies hold and bid for long term instruments and which factors affect their choices the paper uses monthly asset level portfolios to show that despite the expectations mutual and pension funds invest mostly in short term assets relative to insurance companies the significant difference across maturity structures is not driven by the supply side of debt or tactical behavior instead it seems to be explained by manager incentives related to short run monitoring and the liability structure that combined with risk factors tilt portfolios toward short term instruments even when long term investing yields higher returns thus the expansion of large institutional investors does not necessarily imply longer term markets

the performance of us equity mutual funds the paper examines the performance of us no load equity mutual funds fund performance is derived using stochastic frontier analysis for a flexible functional form this analysis allows us to derive parametric estimates of efficiency scores for each fund in our sample for the first time in the literature our results indicate that us no load equity funds display varying levels of efficiency over time but also depending on size and on investment style robustness analysis reaffirm the efficiency scores remain consistent across different selections of inputs and outputs as well as the underlying distribution of the return having estimated each fund s efficiency in the sample we unveil their underlying dynamics also with respect to risk and operational characteristics such as flows assets and morningstar star ratings panel var estimations reveal that the response of funds efficiency to a shock in risk is positive and substantial some evidence of reverse causality is also observed finally we extend our analysis to investigate the relationship between funds performance and key covariates across subgroups defined by size

a theory of optimal timing and selectivity abstract we solve an extended optimal portfolio problem in continuous time for any horizon where we allow the mean and variance of returns to be stochastic introduce fund flows to and from the portfolio permit differential investor preferences for dividend versus growth stocks and allow the investor to buy costly information on the random mean and variance of the portfolio to improve his portfolio choice set this model provides analytical results especially useful in understanding the expenditure on timing and selection information a mutual fund undertakes in attempting to improve performance relative to a benchmark we examine this proposition for growth and income funds long and short investment horizons and also account for fund inflows and outflows we also combine our model of costly learning with the traditional model of incomplete information to understand the interaction between costly and costless learning the approach taken is a purely theoretical one and in this regard the paper is normative in spirit we anticipate that the propositions in this paper will provide two byproducts i a framework for fund managers to think about how to allocate information expenses between timing and selection skills and ii give academics especially empirical researchers a theoretical backdrop against which to examine the mutual fund industry

fiscal year ends and nonlinear incentive contracts the effect on business seasonality salesperson and executive compensation contracts typically specify a nonlinear relationship between firm revenues and pay these agents therefore have incentive to manipulate prices influence the timing of customer purchases and vary effort over their firms fiscal years this paper empirically establishes results consistent with agents focusing on performance over the fiscal year most notably in addition to varying with the calendar business cycle manufacturing firms sales are higher at the end of the fiscal year and lower at the beginning than they are in the middle further evidence is found in fiscal year price movements and patterns in the industry variation of fiscal year effects

performance measurement with selectivity market and volatility timing the performance of portfolio managers depends on market timing volatility timing and security selection we develop holdings based performance measures that adjust for risk using stochastic discount factors display all three components in a consistent framework and avoid strong assumptions about managers behavior previous models leave out some of the components of performance and correcting for this we deliver better measures of selectivity sorting stocks held by funds on selectivity produces a quintile spread in four factor alphas greater than 2 5 per year before costs and more than 1 7 greater than found using the daniel grinblatt titman and wermers 1997 measure