Portfolio Manager Ownership and Mutual Fund Risk Taking

This paper studies the effect of portfolio manager ownership (i.e., skin in the game) on mutual fund risk-shifting behavior. Previous literature suggests that risk shifting can hurt fund performance and impose costs on fund investors. We find that portfolio manager ownership can mitigate managers’ incentive to engage in such risk-shifting behavior. In particular, using holdings-based risk-shifting measures, we find that portfolio manager ownership reduces both intra-year and across-year risk-shifting activities. Fund investors reward funds with greater managerial ownership with more capital inflows. Overall, our evidence suggests that portfolio manager ownership serves as an incentive alignment mechanism and has important implications to fund investors.