Broken Promises, Competition, and Capital Allocation in the Mutual Fund Industry

Simona Abis, Anton Lines*

*Corresponding author for this work

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Abstract

What characteristics of mutual funds do investors care about? In addition to performance and fees, we show that investors exhibit a clear preference for managers who adhere to the strategies they describe in their prospectuses. Capital flows respond negatively when funds diverge from the average holdings of their text-based strategy peer groups, but positively when they outperform those peer averages. We identify this effect using a novel instrumental variables approach, and show that funds face a delicate trade-off between keeping their promises and outperforming their peers who make similar promises.
Original languageEnglish
Article number103948
JournalJournal of Financial Economics
Volume162
Number of pages35
ISSN0304-405X
DOIs
Publication statusPublished - Dec 2024

Keywords

  • Mutual fund strategies
  • Prospectuses
  • Industrial organization
  • Fund flows
  • Machine learning

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