A Few Bad Apples? Scandalous Behavior of Mutual Fund Managers

Recent scandals in the business world have intensified the demand for an explanation of the causes of corporate wrongdoing. This study empirically tests the effects of mutual fund management fees and control structures on the likelihood of illegal activity within mutual fund organizations. Specific attention is given to the presence of agency duality issues in the mutual fund industry and how this influences the motivations and decisions of fund managers. Findings provide support for the hypothesized relationship that higher levels of management fees decrease the likelihood of illegal behavior. Additionally, control of the mutual fund by external management is found to have a negative impact on the likelihood of illegal activity while also acting as a moderator of the management fee-illegal behavior relationship. Justin Davis is an Assistant Professor of Strategic Management at Ohio University and Doctoral Candidate at The University of Texas at Arlington. His primary research interests include firm-level entrepreneurship, agency issues in corporate governance, and venture capital investment. Dr. G. Tyge Payne is an Assistant Professor of Strategic Management in the Jerry S. Rawls College of Business at Texas Tech University. His primary research interests include organization-environment fit/misfit, firm-level and corporate enterpreneurship; dual agency issues, and interorganizational relationships. Dr. Gary C. McMahan is an Associate Professor of Management and Coordinator of the Ph.D. Program in Management at The University of Texas at Arlington. His research interests include the strategic role of human resources in organizations and corporate governance and ethics in financial services institutions. He has published over 40 articles, monographs, proceedings, and book chapters.