Abstract

http://ssrn.com/abstract=1586530
 


 



Worthless Warnings? Testing the Effectiveness of Disclaimers in Mutual Fund Advertisements


Molly Mercer


DePaul University

Alan R. Palmiter


Wake Forest University - School of Law

Ahmed Taha


Pepperdine University School of Law

April 8, 2010

Journal of Empirical Legal Studies, September 2010

Abstract:     
More than $11 trillion is invested in mutual funds in the United States. Mutual fund investors flock to funds with high past returns, despite there being little, if any, relationship between high past returns and high future returns. Because fund management fees are based on the amount of assets invested in their funds, however, fund companies regularly advertise the returns of their high-performing funds. The SEC requires these advertisements to contain a disclaimer warning that past returns don’t guarantee future returns and that investors could lose money in the funds. This article presents the results of an experiment that finds that this SEC-mandated disclaimer is completely ineffective. The disclaimer neither reduces investors’ propensity to invest in advertised funds nor diminishes their expectations regarding the funds’ future returns. The experiment also suggests, however, that a stronger disclaimer – one that informs investors that high fund returns generally don’t persist – would be much more effective.

Number of Pages in PDF File: 36

Keywords: mutual funds, disclosure, warnings, disclaimers, regulation, advertising

JEL Classification: K22, M37, G23

Accepted Paper Series


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Date posted: April 8, 2010 ; Last revised: July 8, 2010

Suggested Citation

Mercer, Molly and Palmiter, Alan R. and Taha, Ahmed, Worthless Warnings? Testing the Effectiveness of Disclaimers in Mutual Fund Advertisements (April 8, 2010). Journal of Empirical Legal Studies, September 2010. Available at SSRN: http://ssrn.com/abstract=1586530

Contact Information

Molly Mercer (Contact Author)
DePaul University ( email )
Chicago, IL 60604
United States
(312)362-8956 (Phone)
HOME PAGE: http://samson.comtech.depaul.edu/faculty/member/Molly/Mercer/
Alan R. Palmiter
Wake Forest University - School of Law ( email )
P.O. Box 7206
Winston-Salem, NC 27109
United States
336-758-5711 (Phone)
336-758-4496 (Fax)
Ahmed Taha
Pepperdine University School of Law ( email )
24255 Pacific Coast Highway
Malibu, CA 90263
United States
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