Studies show that funds with low managerial ownership shares significantly underperform, indicating that the manager’s incentives are not aligned with the fund shareholder’s interests. “Skin in the game”, i.e. fund managers being invested in their own portfolios, improves performance, especially for solo-managed funds where individual managers are visible and accountable. It has yet not been investigated whether a manager’s personal income taxation affects this relationship. In the corporate context, research shows that taxation leads to managers being over-exposed to firm-specific risk, leading to inefficiently low risk-taking for invested CEOs.

We investigate the impact of capital gains taxation on risk-taking of fund managers, dependent on their own stake in the respective funds. Extending the finding that ownership disincentives risk-taking, we want to analyze whether capital gains taxes mitigate or enlarge this effect. Funds are more diversified than individual companies, mitigating the problem of over-exposure to diversifiable risk. Equity stakes can also account for a large portion of CEO compensation. However, fund managers could have more leeway when taking risks, as hierarchies are flatter and fund managers have a more direct influence on these decisions.

First, we will investigate the effect of manager-level ownership and taxation on fund-level risk-taking. We will employ a difference-in-differences design by exploiting an exogenous increase in capital gains taxes in the US in 2013, comparing the risk-taking decisions of managers with low and high ownership before and after the reform. Second, we will analyze whether the connection between fund ownership and personal capital gains taxation influences fund performance. We will compare the abnormal returns of highly and lowly affected funds based on their manager’s exposure to the tax effect identified in the first stage.

Project duration

01.01.2022 - 31.12.2022

Project members

Theresa Bührle (Coordinator)
Chia-Yi Yen