Theoretical And Empirical Study Of The Implicit Incentive Effect Of China's Open-end Fund

Portfolio manager is the key person in the operation of an open-ended fund, who has a great impact on fund performance. Therefore, it is of vital importance to apply incentive mechanism to protect the interest of stakeholders and avoid "moral risk". This incentive mechanism compose of explicit incentives and implicit incentives. This paper focus on "fund tournament"-one of the implicit incentives.First, we establish a simple game-theory model which have two fund managers in fund market. The competition for new fund stimulate the fund manager to pursue high performance ranking, then the interim loser will take more risk than the interim winner.Through multivariate linear regression, we found the fund relative performance has a significant positive relation with the fund future flow, which approve that "fund tournament" exist in Chinese fund industry. And this will have an influence on fund manager's risk-taking behavior. With the method of RTN and RAR, the results indicate the manager with poor performance has a tendency to increase the risk-adjusted ratio, while the winner with good performance has an opposite incline. But these risk-adjusting behavior don't improve the fund performance and benefit the investor's welfare.Furthermore, we apply a logistic model to analyze the influential factor of the choice of risk. The result shows, when the size of fund is bigger, the fund history is shorter and the manager has less experience, the manager is more likely to increase the portfolio risk. From the empirical analysis in this paper, we come to the conclusion that "fund tournament" has an adverse incentive on fund manager. Finally, some suggestion is put forward.