Abstract
This paper documents that mutual fund managers who experience distress in one fund tend to subsequently take on more risk in other funds they manage. Specifically, portfolio managers decrease the cash holdings and increase the systematic risk component in their linked funds. This increased risk-taking appears to be primarily motivated by managers' compensation contracts and is value-destroying for fund investors. The response to the distress shock is smaller for portfolio managers with long-term incentive compensation contracts, longer-tenured managers, and teams with female managers. These results highlight fund spillover effects through common portfolio managers and agency conflicts in the mutual fund industry.
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