Mutual Funds and Risk Disclosure: Information Content of Fund Prospectuses

Nils Jonathan Krakow and Timo Schäfer
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Nils Jonathan Krakow: University of Zurich - Department of Banking and Finance
Timo Schäfer: Goethe University Frankfurt - Faculty of Economics and Business Administration

No 20-54, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Mutual funds are mandated by the Securities and Exchange Commission (SEC) to disclose information on their investment objectives and risks. In this paper, we study the informational value of U.S. mutual funds’ qualitative disclosures by analyzing the content of funds’ prospectuses. First, we find that funds disclosed risks increase with their exposed risk. They inform, in particular, extensively about their idiosyncratic risks and less about their systematic risks. Second, using methods from textual analysis, we document that around one-third of the variation in the content of funds’ risk disclosures is fund-specific, while a substantial part of a fund’s risk disclosures is determined at the fund group level. Our findings suggest that the relative informativeness in funds’ prospectuses has been, on average, decreasing over time. Third, we show that regular content-based updates of the disclosed risks provide relevant information in predicting future fund performance. Investors, however, do not react to this new information but rather to the content’s informativeness. Finally, using an event study framework relying on matching techniques, we document that investors also do not respond to the provision of additional simplified disclosure.

Keywords: Mutual Funds; Risk Disclosure; Textual Analysis; Fund Performance; Fund Flows (search for similar items in EconPapers)
JEL-codes: D8 G14 G23 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2020-06
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2054

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