Do shocks to personal wealth affect risk-taking in delegated portfolios?

Abstract. Using exogenous wealth shocks stemming from the collapse of the housing market, we show that managers who experience substantial losses in their home values subsequently reduce risk in their delegated funds. The decline in fund risk comes through reductions in idiosyncratic risk and tracking error, suggesting that the behavior is likely driven by career concerns. Our paper provides evidence that idiosyncratic personal preferences affect mutual fund managers’ professional decisions and offers a methodology for testing for manager effects that is not subject to the selection critique of Fee, Hadlock, and Pierce (2013).

Recommended citation: Pool, Veronika K., Noah Stoffman, Scott E. Yonker, and Hanjiang Zhang. "Do shocks to personal wealth affect risk-taking in delegated portfolios?" Review of Financial Studies 32, no. 4 (2019): 1457-1493.
Download Paper