Comment on “Mutual Fund Tournament Test: Do Shareholders Benefit from Fund Managers’ Risk- Taking Behavior” Pei-Gi Shu Department of Business Administration Fu-Jen Catholic University

Summary Extreme interim losers reduce risk while medium winners increase risk – inconsistent with the “tournament” hypothesis proposed by Brown, Harlow, and Starks (1996) Career risk account for the risk-deduction behavior of extreme losers. Overconfidence and a call-option payoff scheme bounded by a cap account for the risk-increasing behavior of medium winners. The interim risk shift of fund managers is not to the best interest of fund investors.

Contributions Use quartile-based instead of median-based performance categorization to further contrast the risk-taking behavior of mutual fund managers. Include alternative hypotheses to discuss the performance-risk relation of mutual fund managers. Well-structured to link the relationship among performance, risk-shifting behavior, and ex-post returns. Document various types of interim risk changes for different fund categories.

Comments and Suggestions (1) How to include and contrast different arguments (career concern, attribution theory, overconfidence, prospect theory, and option- like payoff scheme) into testable hypotheses? For example, it would be more applicable for repeated or long-term losers to take serious concern of being fired. Overconfidence is also somewhat acquired or accumulated through consecutive successes.

Comments and Suggestions (1) Con. In contrast, prospect theory or option-like payoff scheme come by nature is independent from performance evaluation period. Therefore, the frequency and time-frame of performance evaluation could be further taken into account in experiments as to discern the performance-risk relationship for mutual fund managers.

Comments and Suggestions (2) If the concern of being fired dominates tournament argument for extreme losers, it is suggested to provide evidences that losers are more likely to be replaced. Moreover, I see no reason why the extreme losers who reduce portfolio risk still suffer inferior ex-post returns? A further discussion is needed.

Comments and Suggestions (3) Table 2: Why the cutoff of RAR (σ 2 /σ 1 ) is set at sample median instead of 1 that could be more intuitively appearing to illustrate whether fund managers increase or decrease their portfolio risk after interim performance evaluation?

Comments and Suggestions (4) Table 4 Regression Analysis: The dependent variable, std i,t /std i,t-1, is presumably to be negatively correlated with std i,t-1 (independent variable). I would suggest alternative dependent variable such as a risk- increasing dummy that takes the value of 1 if the fund manager increases risk and 0 otherwise.