Redemption Fees: Reward for Punishment

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

Michael S. Finke

The American College

David Nanigian

California State University, Fullerton - Department of Finance

William Waller

Carnegie Mellon University - David A. Tepper School of Business

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

California State University, Fullerton - Department of Finance ( email )

PO Box 34080
Fullerton, CA 92834-9480
United States

William Waller

Carnegie Mellon University - David A. Tepper School of Business ( email )

Pittsburgh, PA
United States

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