The Market Penalty for Mutual Fund Scandals

Abstract:     
Using fund flow data from 1994 to 2004, we examine the market response to mutual fund scandals. During the 12 month period beginning with the first report of a scandal in the Wall Street Journal, scandal funds experience an economically and statistically significant outflow of assets. The outflow is greater for funds that experience a more severe scandal and for funds where the scandal results in an increased risk of future harm to fund investors. Who initially discovers the scandal is an important determinant of the amount of outflows: scandals first discovered by the SEC (as opposed to a non-governmental source or another governmental body) experience no significant outflows. Funds in the same family as the scandal fund also experience statistically significant outflows, though at lower scale than the corresponding outflows of scandal funds. Outflows for scandal family funds are greater where the scandal fund accounted for a larger share of the assets of the fund family, where the scandal was more severe, and where the scandal increased the risk of future harm to investors.

Keywords: mutual funds, regulation, investor protection

JEL Classifications: G20, G23, K22

Accepted Paper Series