Redemption Fees: Reward for Punishment

40 Pages Posted: 14 Apr 2008 Last revised: 16 Sep 2015

See all articles by Michael S. Finke

Michael S. Finke

The American College

David Nanigian

San Diego State University - Fowler College of Business - Finance Department

William Waller

Tulane University - Finance & Economics

Date Written: August 10, 2012

Abstract

Short-term redemption fees may prevent investors from frequently trading in and out of mutual funds, which results in an implicit wealth transfer from long- to short-term fund investors. This paper studies determinants and implications of short-term redemption fees. We find that the probability of redemption fee initiation is increasing in operating expenses and recent returns and decreasing in the liquidity of portfolio stockholding. In the cross-section of mutual funds, those with redemption fees outperform their counterparts by 1.0 to 1.4 percent a year. Moreover, we observe this increase within a given fund such that the estimate is not simply a proxy for managerial quality. Instead, portfolio characteristics change with the introduction of a redemption fee. Most notably cash holdings decrease by 77 to 102 basis points after fee initiation.

Keywords: Mutual Funds, Redemption Fees

JEL Classification: G23, G12

Suggested Citation

Finke, Michael S. and Nanigian, David and Waller, William, Redemption Fees: Reward for Punishment (August 10, 2012). Available at SSRN: https://ssrn.com/abstract=1118959 or http://dx.doi.org/10.2139/ssrn.1118959

Michael S. Finke (Contact Author)

The American College ( email )

Bryn Mawr, PA 19010
United States

David Nanigian

San Diego State University - Fowler College of Business - Finance Department ( email )

5500 Campanile Drive
San Diego, CA 92182-8236
United States
619-594-3949 (Phone)

HOME PAGE: http://https://business.sdsu.edu/about/directory/dnanigian#Research

William Waller

Tulane University - Finance & Economics ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States

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