Mehri: The Differential Effects of Law, Culture and Political Risk on Fees, Performance and Risk-Taking Behavior of Islamic and Conventional Funds

ABSTRACT :

This paper considers an international sample of conventional and Islamic mutual funds to assess whether law, culture, and political risk affect the performance, risk-taking behavior and compensation fees of mutual funds. Overall, the results show strongly that legal conditions, culture, and political risk have robust differential effects on fees, performance and risk-taking behavior of Islamic funds and conventional funds. We find that Islamic mutual funds in countries with higher legal conditions receive lower fees, whereas conventional funds receive higher carried interest, lower fixed management fees and weaker expense ratio. In such conditions, conventional and Islamic fund managers have lower performance and take higher specific and systematic risk. Overall, Hoefsted culture’s measures affect significantly the fees structure, performance and risk-taking behavior with robust differential effects on Islamic and conventional funds. Focusing on political risk effects, we show that, in countries with higher political risk, carried interest and performance will be higher, whereas the specific and systematic risk will be stronger for Islamic and conventional funds. The components of country legality and political risk Index have significant differential effects on Islamic and conventional funds’ characteristics.

 

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