Silent Runs in Mutual Fund Industry
42 Pages Posted: 16 Feb 2009
Date Written: January 6, 2009
This paper investigates whether anticipation of adverse events can trigger silent runs in mutual funds. We define a mutual-fund silent run as a situation in which investors redeem shares in anticipation of an adverse event. The adverse event in question is the litigations filed in 2003 and 2004 concerning market-timing and late trading practices. We find that silent runs start as early as a half year before litigation announcements. Size of silent runs is about half the size of the runs after litigation announcements. Run size differs across fund and management characteristics, such as management reputation and share distribution channels. Investors, who run before litigation announcements, earn significantly higher risk- and peer- adjusted returns than do those who run after. Our analysis suggests that pro-rata-ownership design in mutual funds is not sufficient to prevent runs. Informed investors may still exit before adverse events become public to avoid the cost of forced portfolio liquidation. To certain extent, runs expose mutual funds to similar kind of financial fragility faced by banks.
Keywords: Silent runs, adverse event, mutual fund flows, returns
JEL Classification: G23, G14
Suggested Citation: Suggested Citation