OF TOURNAMENTS AND TEMPTATIONS - AN ANALYSIS OF MANAGERIAL INCENTIVESIN THE MUTUAL FUND INDUSTRY

We test the hypothesis that when their compensation is linked to relat ive performance, managers of investment portfolios likely to end up as ''losers'' will manipulate fund risk differently than those managing portfolios likely to be ''winners.'' An empirical investigation of the performance of 334 growth-oriented mutual funds during 1976 to 1991 d emonstrates that mid-year losers tend to increase fund volatility in t he latter part of an annual assessment period to a greater extent than mid-year winners. Furthermore, we show that this effect became strong er as industry growth and investor awareness of fund performance incre ased over time.