Pay-performance sensitivity and risk-taking behaviors: Evidence from closed-end funds

The pay-performance sensitivity (PPS) of managers of closed-end funds is explicitly specified in their contracts as the marginal rate of the funds' net asset value. Using a sample of US closed-end funds from 2006 to 2009, this paper investigates the relationship between the PPS and risk-taking behaviors of fund managers. After controlling for endogeneity, we find that fund return volatility and fund PPS positively determine each other. Furthermore, the positive relationship is more pronounced for closed-end funds engaging in alternative investments or in emerging markets.