Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry



  • W. V. HARLOW,


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    • Brown and Starks are from the University of Texas at Austin, and Harlow is from Fidelity Management & Research. The authors acknowledge the helpful suggestions of Brad Barber, Christopher Blake, Jeff Coles, Will Goetzmann, David Ikenberry, Chris James, Jon Karpoff, Paul Laux, Dan Quan, Henri Servaes, Meir Statman, Richard Thaler, Charles Trzcinka, Marc Zenner, and the participants of workshops at the University of Texas, Yale University, University of North Carolina, University of California-Davis, and University of Colorado-Denver. We would especially like to acknowledge the contributions of René Stulz (the editor) and an anonymous referee. Earlier versions of this paper have also been presented at the American Finance Association, Financial Management Association, and European Finance Association meetings. The opinions and analyses presented herein are those of the authors and do not necessarily represent the views of Fidelity Management & Research.


We test the hypothesis that when their compensation is linked to relative performance, managers of investment portfolios likely to end up as “losers” will manipulate fund risk differently than those managing portfolios likely to be “winners.” An empirical investigation of the performance of 334 growth-oriented mutual funds during 1976 to 1991 demonstrates that mid-year losers tend to increase fund volatility in the latter part of an annual assessment period to a greater extent than mid-year winners. Furthermore, we show that this effect became stronger as industry growth and investor awareness of fund performance increased over time.