Quality and Product Differentiation: Theory and Evidence from the Mutual Fund Industry

Maxime Bonelli, Anastasia Buyalskaya and Tianhao Yao
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Maxime Bonelli: London Business School - Department of Finance
Anastasia Buyalskaya: HEC Paris
Tianhao Yao: Singapore Management University

No 1428, HEC Research Papers Series from HEC Paris

Abstract: We investigate the strategic behavior of financial products in differentiating beyond performance, using mutual funds as our laboratory. We provide evidence consistent with low-performing funds strategically using product differentiation, reflected in more unique fund prospectuses, to compete for customers by offering more niche products. Exploiting the issuance of Morningstar ratings as a shock to perceived quality, we establish a causal link between low quality and increased differentiation. Funds receiving a low rating actively change their prospectuses, increasing their product differentiation, which improves their survival likelihood. Much like other consumer products, mutual funds strategically pursue product differentiation to soften quality-based competition.

Keywords: Product Differentiation; Mutual Funds; Industrial Organization; Textual Analysis; Ratings (search for similar items in EconPapers)
JEL-codes: D83 G11 G23 L10 (search for similar items in EconPapers)
Pages: 82 pages
Date: 2021-10-11
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1428

DOI: 10.2139/ssrn.3939239

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