Portfolio Pumping and Fund Performance Ranking : A Performance-Based Compensation Contract Perspective

We collect compensation policy data from 60 Chinese mutual fund companies, which covers 88% of assets under management by all active stock and stock-oriented hybrid mutual funds in China. Using the collected data, we investigate the portfolio pumping from a performance-based perspective. We find that portfolio pumping is stronger for funds ranking around critical points of performance distribution (i.e. top one-tenth, one-fourth, one third and one half cutoffs). Moreover, this finding is mainly driven by funds from companies setting these critical points to grade managers' bonus levels. Our findings provide evidence of portfolio pumping motivated by performance ranking, instead of flow-performance relationship that prior studies documented