Open-end Fund Manager Investment Risk Adjustment Behavioral Research

Agent problem has always been the focus of corporate governance theory research, among which the governance of mutual fund management companies are more complicated. It has been long for both academic and practical experts to explore the fundamental of this field. The mutual fund performance tournament has been attracting many concerns recent years due to its important practical meaning for the financial industry. This paper focuses on the investment behavior adjustments of mutual fund managers who are influenced by the fund performance tournament in China. Our empirical research results indicated that mutual fund managers react substantially differently from various market environments in China, which has not only enhanced the practice of fund incentive policy, but also enrich the horizon of mutual fund tournament theory.Along with the rapid development of mutual fund management industry in China these years, plenty of fortunes are at the disposal of those fund management companies who process increasing talking power both at the industry sector and at the financial market in China. Lots of attractiveness has been focus on the question that whether fund management act on the behalf of fund shareholders. Under the current tournament environment, are the fund managers going to work at their best interests rather than shareholders? If the answer is yes, our financial market would suffer a lot and adversely hinder the health development for the economy development.Both China and overseas scholars has been doing substantial research on the topic of mutual fund performance tournament from theory and empirical research and came up with lots of results for the last 20 years. However, these researches usually arrived various conclusions, some of which even are of contradiction. Recent papers from overseas scholars pointed another essential effect had been ignored for a long time under the performance tournament environment, which can be called employment incentive effect compared with compensation incentive. The academic research results regarding the mutual fund performance tournament seemed very inconsistent across various time frames, which could be attributable to the changing effect of the combination of compensation and employment incentives in different market environment. This paper aims at finding whether there is employment incentive and the interaction with compensation inventive in different market environment in China to get better understanding of China's mutual fund market.Based on the analysis of the panel data of Chinese stock-type open-ended fund from the year of 2005 to 2010, including 3 years bull market and 3 years bear market respectively, we examine the risk adjusting behavior of mutual fund managers due to compensation incentive and employment incentive which caused by performance ranking and could hurt the investors badly. Our empirical investigation indicates that of the risk taking behavior of mutual fund managers crucially depends on the relative importance of these incentives. When the market is bullish, the compensation incentive is more important than employment incentive, fund managers with a poor midyear performance tend to increase risk relative to leading managers to catch up with the midyear winners. Conversely, when the market is bearish the compensation incentive is low, employment incentive become more relevant and fund managers with a poor midyear performance decrease risk to prevent potential job loss.