Why do fund managers increase risk?
HaYeonjeong (Pusan National University). KoKwangsoo
(Pusan National University)
paper examines the relationship between the increase in fund risk and
subsequent cash flows. We attempt to test the hypothesis that an increase in
fund risk actually increases the net flows of equity funds, which is a basic
assumption of risk shifting. We find that a change in fund risk has a positive
and convex relationship with the fund's net flows. The effect of risk changes
on net flows is a natural consequence of its effects on inflows and outflows.
This paper's empirical results are robust to return frequency, fund age, and
fund size. Our findings create incentives for managers to shift risk as
documented in the mutual fund literature.
increase, Net flows, Inflows, Outflows, Agency problem