Abstract - Employment Risk, Compensation Incentives and Managerial Risk Taking: Evidence from the Mutual Fund Industry

We examine the influence on managerial risk taking of incentives due to employment risk and due to compensation. Our empirical investigation of the risk taking behavior of mutual fund managers indicates that managerial risk taking crucially depends on the relative importance of these incentives. When employment risk is more important than compensation incentives, midyear losers tend to decrease risk relative to leading managers in order to prevent potential job loss. When employment risk is low, compensation incentives become more relevant and midyear losers increase risk in order to catch up with the midyear winners.

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