Download This PaperStar Rating, Fund Flows and Performance Predictability - Evidence from Norway
32 Pages Posted: 9 Oct 2019 Last revised: 24 Mar 2021
Date Written: March 21, 2021
Abstract
This paper studies the effect of Morningstar ratings on fund flows and fund performance predictability using a proprietary data set of equity funds from Norway. Controlling for a number of variables proxying for fund and firm visibility, we find that fund flows respond asymmetrically to changes in Morningstar ratings. Specifically, 4– and 5–star rated funds get more flows, and funds upgraded to 5–star get significantly more flows not only in the next month, but also over the following 12 months after the rating change. Downgraded funds suffer outflows, but the results only become statistically significant when fund performance falls to a 2–star rating. We also find evidence of long–term performance predictability for top–rated funds. As the mutual fund industry develops worldwide, our results suggest that Morningstar has been successful in bringing its brand name to markets outside the United States, and that Morningstar ratings are a valuable tool for helping investors make strong investment decisions.
Keywords: Mutual funds; Morningstar ratings; Fund flows; Fund performance; Investor behavior
JEL Classification: G15;G23
Suggested Citation: Suggested Citation
Antonio Freitas Miguel (Contact Author)
Nova School of Business and Economics ( email )
Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal
Sofia Brito Ramos
ESSEC Business School ( email )
3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France