Corporate Governance and Mutual Fund Performance: A First Look at the Morningstar Stewardship Grades

33 Pages Posted: 22 Mar 2008

See all articles by Jay W. Wellman

Jay W. Wellman

Cornell University - School of Hotel Administration

Jian Zhou

University of Hawaii at Manoa

Multiple version iconThere are 2 versions of this paper

Date Written: March 18, 2008

Abstract

This paper documents for the first time the relationship between mutual fund governance and mutual fund performance. Using the first release of the Morningstar Stewardship Grades on August 24, 2004, we find that funds receiving good grades outperformed funds with bad grades by 19 to 23 basis points per month over 1/2001-7/2004 and by 10 to 16 basis points per month over 9/2004-12/2006. In an examination of daily fund flows subsequent to the announcement date, we see evidence that investors sold funds with poor grades and bought funds with good grades. Of the five variables Morningstar uses to compute their grades, the Board Quality and Fees variables shows the most explanatory power. These results broadly support the main conclusion of Gompers, Ishii and Metrick (2003 QJE), namely that corporate governance significantly affects performance.

Keywords: Mutual Funds, Governance, Performance

JEL Classification: G11, G23, G34

Suggested Citation

Wellman, Jay W. and Zhou, Jian, Corporate Governance and Mutual Fund Performance: A First Look at the Morningstar Stewardship Grades (March 18, 2008). Available at SSRN: https://ssrn.com/abstract=1107841 or http://dx.doi.org/10.2139/ssrn.1107841

Jay W. Wellman

Cornell University - School of Hotel Administration ( email )

435B Statler Hall
Ithaca, NY 14853-6902
United States

Jian Zhou (Contact Author)

University of Hawaii at Manoa ( email )

Honolulu, HI 96822
United States

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