Broken promises, competition, and capital allocation in the mutual fund industry

Simona Abis and Anton Lines

Journal of Financial Economics, 2024, vol. 162, issue C

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.

Keywords: Mutual fund strategies; Prospectuses; Industrial organization; Fund flows; Machine learning (search for similar items in EconPapers)
JEL-codes: G11 G23 L10 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:162:y:2024:i:c:s0304405x24001715

DOI: 10.1016/j.jfineco.2024.103948

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