The Incentive Mechanism Of Fund Managers And Its Impact On The Market Behavior

Along with the rapid development of China's stock market, the size of the fund industry as a whole has expanded dramatically. More and more individual investors choose to invest through funds. Securities investment funds as institutional investors have economies of scale and information superiority. Unfortunately, as a proxy investment regime, there also exists the principal-agent problem between individual investors and fund managers. To reduce fund managers'moral hazard, principals (investors) often resort to the incentive and restrictive mechanism. But the mechanism in turn may affect the investment behavior of fund managers. Sometimes the mechanism may even breed some irrational behaviors or new forms of moral hazard. As a result, the market operations and the allocation of resources will also be influenced. So what are the main problems of the current incentive and restrictive mechanism of fund managers in China? How does the mechanism influence fund managers'investment behavior? How to improve it? This paper will focus on the issues mentioned above.After the brief review on the relevant theories and literatures, this paper will first introduce the current status of China's incentive mechanism, and then we will analyze its shortcomings. This paper mainly discusses the impact of pay and reputation mechanism on the investment behavior of fund managers. To begin with, we will compare the different influences between long-term and short-term incentive mechanisms by constructing models and explore the herding behavior of fund managers caused by the relative performance evaluation mechanism. After that, we will analyze the reasons why reputation mechanism would trigger the herding behavior of fund managers and its impact on the whole market. In addition, the paper will also focus on how to improve the current situation. On the basis of constructing a simple model exploring the key factors determining fund managers'moral hazard, we come to some practical ways to improve the pay and reputation mechanism and the corporate governance of fund companies as well as the external supervision on the whole fund industry. The innovation of this paper is as follows: Firstly, compared to the fact that most domestic scholars attribute the moral hazard of fund managers to the shortcomings of China's stock market, the corporate governance of fund companies and other institutional factors, we try to explore directly the relations between moral hazard and incentive mechanism which is also the most direct cause of the former. Secondly, with regard to the research on the incentive mechanism, scholars both at home and abroad tend to focus on the level of fund companies, rather than the fund managers directly. This makes this paper different.