FUND MANAGEMENT COMPANY GOVERNANCE AND STRATEGIC CROSS-FUND SUBSIDIZATION

We manually collect data on the governance structure of Chinese Fund Management Companies (FMCs) and examine its impact on FMCs’ strategic cross-fund subsidization. We find that cross-fund subsidization within the same FMC continues even after it was forbidden by the regulator in 2011. FMCs with more shares held by state shareholders or security firms, more efficient board structures, more capable independent directors, and a less powerful CEO conduct fewer cross-fund subsidization behaviors. Cross-fund subsidization becomes more prominent when FMCs have more incentives to inflate their performance, and the deterrent effect of FMCs’ governance still holds in such scenarios. In contrast to the focus on mutual fund characteristics in prior studies, our study provides evidence about the importance of FMCs’ internal governance, which can effectively mitigate the principal–agent conflicts between funds and fund investors.