Reputation and Mutual Fund Choice
William Christopher Gerken
University of Kentucky - Finance
Laura T. Starks
University of Texas at Austin - Department of Finance
University of Texas at Austin - McCombs School of Busiiness
March 14, 2012
We analyze individuals' mutual fund holdings and trades to examine hypotheses regarding the effects of mutual fund family reputation on individuals' mutual fund investment decisions. We present three key findings that suggest the importance of fund family reputation on mutual fund choice. First, even though our sample investors are purchasing funds through a discount brokerage firm, we find that individuals cluster their investments within particular families. Second, we show that sample investors are significantly more likely to purchase funds from families with which they have previous experience, and the effect is even greater if the previous experience was positive. Finally, we show that individuals' beliefs about funds belonging to more reputable families change slowly, as evidenced by relatively lower levels of redemptions of poorly performing funds from families with which they have previous experience. Our results are robust to alternative explanations such as familiarity bias, style preference, or individual search costs.
Number of Pages in PDF File: 34
Keywords: Mutual fund, mutual fund family, reputation, portfolio choice
JEL Classification: G11, D14working papers series
Date posted: March 15, 2012
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