The Effect Of Fund Shares Excitation Among Chinese Fund Managers

Since the bull market in 2006, China’s securities market experiences a rapid development. But while the fund industry assets are expanding and more products are producing, fund company executives and fund managers are also changing at an rare frequency. A survey report shows that after 2013 there are 69 fund managers decide to join private equity fund, accounting for up to 77%. There are indications that the high turnover rate of the entire fund industry is the lack of incentives. And the root cause of this lacking from securities investment fund is that special dual agency relationship. In this particular agency relationship, investors expect to maximize asset value, the fund management company expects to maximize the size of the fund and the fund managers are expected individual utility maximization, due to the inconsistency of the three objective functions, which produces the principal-agent problem. This dual agency relationship will lead to a more obvious conflict among them. Lack of incentives have led us to think of the fund industry, more and more scholars began to explore new incentives for fund managers from the perspective of corporate governance, which holds the fund shares excitation is considered a more subtle approach.To study this new incentive in the theoretical and practical effect, this paper first collects the existing literature to make a preparation for the follow-up study. Then on the basis of previous research, we build a research model. In certain participation constraint and incentive compatibility constraints on the model, we get an optimal solution involved in holding the base proportion, effort and risk appetite. Model studies have concluded that fund shares excitation can raise fund managers’effort level, and also have a positive impact on their risk selection. The improving of their level could encourage them to strive to gather more information, which will lead them to choose a combination of higher risk to get higher returns, but the actual risk was not significantly increased due to the increased accuracy. Factors affecting the fund shares excitation are the size of the fund, practitioners’experience, risk preferences and market performance and so on.To test the conclusions made by the model, we are using statistics of 210 open funds from 2010 to 2013. The results show that coefficient between the fund shares and fund performance is positive and the coefficient is negative between the fund shares and real risk. Fund shares coefficient ratio with fund managers’ risk appetite is positive, and the coefficient with funds’ size is negative. The coefficient between the risk-free is not significant. Both theoretical and empirical support fund shares incentives can indeed solving that dual principal-agent problem.