A Study Of The Impact Of Performance Ranking On The Fund Managers’ Risk Taking Behavior

With the development of fund industry in China, the competition between funds is increasingly fierce. Investors and fund managers put much attention on performance rankings between funds, especially the annual performance ranking. The annual performance rankings in fund industry can be viewed as a fierce tournament, and the ultimate goals of the fund managers is to be the winner. At present the performance evaluation of the fund is based on short-term relative performance ranking. The fund managers who get a better result will gain the tempting annual bonus, therefore they intent to take a more aggressive risk taking behavior. How the relative performance ranking affects the investment behavior of fund managers? Whether the complex agency relationship between fund managers and investors will entice self-interested behavior of fund managers? All of the problems need discuss.Based on the research results of the foreign and domestic scholars, this paper mainly examines the impact of relative performance rankings in open-end equity funds on the of fund managers risk taking behavior. Firstly, this paper examines contingency table method and regression analysis to study the impact of the performance rankings on the fund managers’ risk taking behavior. After that, this paper use grouping test and regression analysis to study the impact of fund managers’risk taking behavior on the future performance of funds.The main conclusions are as follows:l.The risk taking behavior of China’open-end equity funds is significantly affected by relative performance rankings. What is more, the risk taking behavior is not the same in different market phase. In a bull market, the loser funds have a greater motivation to increase the portfolio’ risk level in the latter part of the year. In a bear market, the winner funds have a greater motivation to increases the portfolio’ risk level in the latter part of the year.2. The fund managers of different types of funds have differences in risk taking behavior. The new funds’ managers and the small-scale funds’ managers tend to have a greater risk taking behavior than the old funds’ managers and the large-scale funds’ managers. In addition, the replacement of the fund manager does not affect the robustness of the empirical results, which means the risk taking behavior of fund managers follow a same principle.3. The risk taking behavior of China’ open-end equity funds do not significantly improve future performance in the second half year. The complex agency relationship between fund managers and investors entices the moral hazard problem of fund managers, which will harm the benefits of fund holders.