The Research Of Fee Incentive And Ownership Incentive To Reduce The Misconduct Behaviors Of Fund Management Company

In recent years, some problems reveal along with the rapid development of China’sinvestment funds. The performances of investment funds were far below expectations, a seriesof scandals were exposed by news media from time to time. All these matters made the publicquestioning if fund managers have fulfilled his fiduciary duty. These problems lead entireinvestment fund industry to the centre of "principal-agent conflicts" whirlpool. Investors’interest to buy fund product is getting lower. The development of investment fund industryturns into bottleneck. These conditions cause people’s serious deliberations, whether thegovernance structure and balance mechanism is able to make the fund managementcompanies to create value for fund holders or not?In the academic field, many scholars had discussed such subjects from perfect internaland external fund incentive restraint mechanisms perspectives, and they propose somecountermeasures from the aspect of content, which are legal constraints, the performancerankings, reputation incentives, fund management companies governance, fund custodiansupervision measures, etc. to deal with the principal-agent conflict between the fund holdersand the fund management companies. However, congront with the inefficiency of externalincentive restraint mechanisms and the absence of internal incentive restraint mechanismsenvironment, most of those studies Inpractice field,, as regulator of China’s securities market,the China Securities Regulatory Commission (CSRC) published regulations about “theemployees of the fund purchase securities investment fund" separately in2007and2012,which encourage fund management companies make institutional arrangements for fundmanagers to buy the fund, with a view to establishing interests binding mechanism of the fundpractitioners and fund share holders.Theoretically, Managerial Ownership can promote the interests and the risk shareingmechanism between fund managers and holders, and then to constraint fund manager’smisconduct and to improve fund governance. However, very few existing research had donesystemic study of changes in fund governance regulation and the effectiveness of managerialownership incentive on contractual fund situations and institutional systems in China.As for governance difficulties existing in our country’s contractual funds, specifically theinsufficiency of theoretical study on the manager misconduct, in this paper, we act the fundmanagers and holders of the agency relationship as the starting point. Firstly, we analysis thebehavior of fund managers prejudicial to the interests of fund investors, which include notonly violations of the law, but also include various incorrect behaviors of unpredictable operation in daily management of fund, information asymmetry and the high cost of thecontract is the source of illegal fund managers and non-rational behavior occurs.Subsequently, to improve the governance mechanisms of the securities investment fundbased on principal-agent theory, game theory and behavioral finance theory, Using descriptivestatistics, comparative study, the theoretical model derivation, to analyze the cause of fundmanager’s misconduct behaviors and the difficult of governance of our country’s contractualfunds. Proposed the governance of the contractual open-end fund should seek a breakthroughfrom the establishment of effective internal incentives: first, the design of effectivemanagement fee incentives, the second is its management of the fund held by fund managers,to achieve the coordinated target functions between principal and agent.Finally, to deduce theoretical models of optimizing the fund management fee incentivesand the efficiency of managerial ownership incentive. We combine theory analysis andempirical tests to analyze effects of managerial ownership incentive, which are viewed inthree aspects: the fund managers’ effort, funds portfolio risk and cost of fund operations, thengo into details which can influence the managerial ownership. We find that funds with highermanagerial ownership exhibit superior performance and lead to a reduction of the portfoliorisk. That is a long-term mechanism to inhibit the misconduct behavior of fund managers.The contribution of this study is mainly reflected in two aspects: first of all, on thecontent of the study, managerial ownership incentive is a long-term mechanism to inhibit themisconduct behavior of fund managers. The inhibition of fund managers misconduct internalincentives cannot be done overnight, in the short term, the management can let go of thecontrol of the fund’s fixed rate, within a specific legal framework which to allow themanagement fee compensation contract to become the choice of market behavior between thefund managers and holders of the results, to make that remuneration of fund managementreflect his capability, credibility and fund scale. In the long term, promoting managerialownership incentive is the bounden duty of the regulatory authorities and fund managementcompanies to seek for the smooth development of fund industry. Secondly, in Researchmethods, theoretical analysis and empirical tests the utilities of managerial ownership incentive. Withthe Principal-agent theory of Mirrlees--Holmstrom condition, we deduce and compare theutility function between managers who have purchased funds and do not hold funds. Thetheoretical model results and empirical studies show that manager who held the higher theproportion of the fund willing to pay more efforts, managers who held the greater theproportion of the fund with more prudently in investment and smaller risk of the portfoliochoice. This study concludes that managerial ownership incentive is able to governance fund manager’s misconduct behaviors effectively.This paper deepens the research of internal incentive mechanism in investment funds.Meanwhile, it provides empirical evidence of constructing system to reduce fund managersmisconduct behaviors.