Pay-Performance Sensitivity and Risk-Taking Behaviors : Evidence from Closed-End Funds

The managers' pay-performance sensitivity (PPS) of closed-end funds is explicitly specified in the management contract as the marginal rate of funds' net asset value. By using the sample of US closed-end funds from 2006 to 2009, this paper investigates the relationship between the PPS and risk-taking behaviors of fund managers. After controlling for endogeneity, we find that fund return volatility and fund PPS positively determine each other. Furthermore, the positive relationship is more pronounced for closed-end funds engaging in alternative investments or in emerging markets