Price Support by Bank-Affiliated Mutual Funds

Abstract:     
Fund managers are double agents; they serve both fund investors and owners of management fi…rms. This confl‡ict of interest may result in trading to support securities prices. Tests of this hypothesis in the Spanish mutual fund industry indicate that bank–-affiliated mutual funds systematically increase (relative to non-–affiliated funds) their holdings of their controlling bank stock when the bank’s stock suffers a large price drop. These trading patterns are inconsistent with a variety of competing hypotheses, such as contrarian trading, crash anticipation, and private information. Consistent with the price support hypothesis, bank–-affiliated funds also trade to support prices around specifi…c corporate events, such as seasoned equity offers and takeovers, when shares are used as the means of payment.

Number of Pages in PDF File: 63

Keywords: price support, conflict of interests, agency problem, mutual funds, asset management, fund families, banks, prosecution

JEL Classification: G30, G23, G32, G28, G21, K22

working papers series