Out of Sight, Out of Mind: The Effects of Expenses on Mutual Fund Flows
Brad M. Barber
University of California, Davis
University of California, Berkeley - Haas School of Business
University of California, Irvine - Paul Merage School of Business
We argue that the purchase decisions of mutual fund investors are influenced by salient, attention-grabbing information. Investors are more sensitive to salient in-your-face fees, like front-end loads and commissions, than operating expenses; they are likely to buy funds that attract their attention through exceptional performance, marketing, or advertising. Our empirical analysis of mutual fund flows over the last 30 years yields strong support for our contention. We find consistently negative relations between fund flows and front-end load fees. We also document a negative relation between fund flows and commissions charged by brokerage firms. In contrast, we find no relation (or a perverse positive relation) between operating expenses and fund flows. Additional analyses indicate that mutual fund marketing and advertising, the costs of which are often embedded in a fund's operating expenses, account for this surprising result.
Number of Pages in PDF File: 36
Keywords: mutual funds, investor behavior, operating expenses
JEL Classification: G11, G18
Date posted: May 3, 2004
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