Performance ranking, regulatory penalty, and improper risk adjustment behavior of fund managers

Abstract

This study is based on a sample dataset of Chinese open-end funds, empirically examining the relationship between performance ranking, regulatory penalty, and improper risk adjustment behavior of fund managers. The results indicate that class B penalties related to criminal offenses could mitigate the improper risk adjustment behavior resulting from agency issues among fund managers, thereby exerting an indirect deterrent effect. However, if the fund experiences a lower ranking in the mid-term evaluation or the top 20 stocks of a sample fund are subjected to regulatory penalties in the first half of the year, the impact is entirely reversed. Secondly, there is a positive correlation between the intensity of regulatory penalties and the degree of inhibition of fund managers’ improper risk adjustment behavior. The larger the expected gap and historically expected surplus, the more pronounced the trend of increasing improper risk-taking becomes. Finally, this paper conducted a collective study on the characteristics of fund managers and discovered that highly educated fund managers are significantly influenced by class B penalties, resulting in an indirect deterrent effect.