Mutual fund tournaments: the sorting bias and new evidence”. Working paper

Since the seminal paper of Brown, Harlow and Starks (1996), researchers have found conflicting results concerning the amount and direction of risk-taking tournament behavior in the mutual fund industry. In this study, we show analytically, numerically and empirically that it is the sorting process typically used in prior studies driving results. When we correct for this issue using a new methodology based on portfolio holdings, we find first half low performing managers increase the risk of their portfolios in the second half of the year over the 1990-2006 period. We also find tournament behavior over this period is unrelated to the median mutual fund return in the first half of the year