Differential Effects of Law, Culture and Political Risk on Performance and Risk-taking Behavior of Fund Managers

This paper considers an international sample of conventional and Islamic mutual funds to assess whether law, culture, and political risk affect the performance and risk-taking behavior of mutual funds. Overall, the results show strongly that legal conditions, culture, and political risk have robust differential effects on performance and risk-taking behavior of Islamic and conventional funds. We find that Islamic and conventional funds in developing countries with lower legal conditions, higher corruption and political risk have higher performance. Likewise, in such conditions, both of Islamic and conventional funds have lower return volatility and systematic risk. Overall, Hoefsted culture's values affect significantly the performance and risk-taking behavior of fund managers with robust differential effects between Islamic and conventional funds. The components of country legality and political risk Index have significant differential effects between Islamic and conventional funds. Overall, the data show the fund manager characteristics (experience, qualifications, etc) and specific fund features matter for the performance and risk-taking behavior of fund managers.