Star Power: The Effect of Morningstar Ratings on Mutual Fund Flow
Diane Del Guercio
University of Oregon, Lundquist College of Business
Paula A. Tkac
Federal Reserve Banks - Federal Reserve Bank of Atlanta
FRB of Atlanta Working Paper No. 2001-15
We apply an event-study methodology on over 10,000 Morningstar star rating changes and find that Morningstar has substantial independent influence on the investment allocation decisions of retail mutual fund investors. It is the discrete change in the star rating itself, and not the change in the underlying performance measures that drives flow. We document economically and statistically significant positive abnormal flow following rating upgrades, and negative abnormal flow following rating downgrades. In contrast to the cross-sectional flow-performance literature, we find evidence of investor punishment of performance declines, some of which is evident immediately in the month of the rating change.
Number of Pages in PDF File: 50
Keywords: mutual funds, asset flow, event-study
JEL Classification: G11, G14, G20
Date posted: October 5, 2001
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