Abstract
We find evidence that risk-shifting by mutual fund managers is linked to their asymmetric performance-based compensation. We show that managers whose mid-year performance is close to their announced benchmark increase their portfolio risk in the second part of the year. As their performance deviates from the benchmark, their risk-shifting decreases except for the most extreme deviations. We find that the deviation from the benchmark dominates the incentives from the flow-performance relationship, supporting the conclusion that risk-shifting is based more on management contracts than on a tournament to capture flows.
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