Abstract
In this paper we investigate the tournament induced risk-shifting behavior of Australian “multi-sector growth funds”. We apply a regression-based methodology and examine tournaments based on the calendar year and the financial year. In our core analysis we find evidence in favor of Taylor’s (J Econ Behav Organ 1455:1–11, 2003) risk shifting tournament hypothesis for financial year-end tournaments. Apart from the standard tournament hypothesis we also report a range of findings regarding stability; fund age; and fund size. Support for the Taylor hypothesis generally continues across these variations as well.
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Notes
BHS’s results indicated that losers did indeed appear to gamble, a result confirmed by Koski and Pontiff (1999) looking at US funds and Garcia and Begona (2000) looking at Spanish mutual funds. Kempf and Ruenzi (2003) extend the tournament model to mutual fund families, finding support for the BHS hypothesis in large fund families but finding the opposite result, that is, that winners increase risk the most, in small fund families.
Busse (2001) found no evidence of a tournament effect when examining daily data for US equity funds. He argued that autocorrelation in daily fund returns could bias monthly volatility estimates, leading to the spurious appearance of a tournament effect, and suggested intra-period risk changes were due to changes in the volatility of stock market common risk factors. However, Goriaev et al. (2005) find that tests of the tournament hypothesis based on monthly data are more robust to autocorrelation effects than tests based on daily data. Nevertheless, they also find that cross-correlation in fund returns may lead to spurious tournament effects.
As a final complication, in a number of cases, funds adopt an October–September reporting year. The 30 September financial reporting year is a legacy of the reporting year adopted early in the 20th century by a number of banks and insurance offices of British origin. In recent times there has been a move to discard this in favor of a standard financial or calendar year reporting period. Given the relatively low incidence of this reporting period, it is not analyzed in this paper.
At the time of the introduction of the mandatory superannuation contributions the rate was between 3% and 5% of the salary depending on the payroll size. It increased to 9% in 2003.
Source: Reserve Bank of Australia Bulletin Statistical Tables, Table B18 Managed Funds, June 2005.
APRA is the prudential regulator of the Australian financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry.
The Superannuation Industry (Supervision) Act (SIS) Act requires audited annual reports to members. AAS25 Australian Accounting Standard provides guidelines for disclosures.
A number of studies such as Grinblatt and Titman (1989), Brown et al. (1992), Carpenter and Lynch (1999) and Carhart et al. (2002) document the economic significance of survivorship bias in studies of equity mutual fund performance, particularly in relation to the issue of persistence in performance. However, and as noted by Del Guercio and Tkac (2002), studies by Sirri and Tufano (1998), Chevalier and Ellison (1997) and Goetzmann and Peles (1997) find that survivorship bias does not affect inferences about the funds flow-performance relationship and, therefore, is not a major issue in studies involving annual tournaments.
To conform with US analysis, Eq. 1 is estimated using calendar year end data.
Our time series data are structured as an unbalanced pool and equations are estimated using OLS adjusted for heteroskedasticity. Initial estimations show low Durbin-Watson statistics indicating serial correlation. Therefore, the model is re-estimated incorporating an AR(1) term (but not reported). The central thrust of our findings are unaffected by this accommodation.
Both variables in the equation are asterisked to indicate that the standardization process has been applied, as discussed at the end of the preceding sub-section.
Variations of these basic tests are applied to all the models that follow.
Unfortunately we are unable to analyze the period prior to the introduction of the Superannuation guarantee levy. Our data starts mid 1989 and the levy was introduced in 1992 hence the tournament analysis is not practical over such a short time frame.
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Acknowledgements
The authors are grateful to an anonymous referee for constructive suggestions. The Australian Research Council is acknowledged for financial support: DPP0773662.
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Hallahan, T., Faff, R.W. & Benson, K.L. Fortune Favours the Bold? Exploring Tournament Behavior among Australian Superannuation Funds. J Finan Serv Res 33, 205–220 (2008). https://doi.org/10.1007/s10693-008-0030-y
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DOI: https://doi.org/10.1007/s10693-008-0030-y