Silent Runs in Mutual Fund Industry

42 Pages Posted: 16 Feb 2009

See all articles by Meijun Qian

Meijun Qian

Australian National University (ANU) - College of Business and Economics

Başak Tanyeri

Bilkent University

Multiple version iconThere are 2 versions of this paper

Date Written: January 6, 2009

Abstract

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

Qian, Meijun and Tanyeri, Başak, Silent Runs in Mutual Fund Industry (January 6, 2009). Available at SSRN: https://ssrn.com/abstract=1343428 or http://dx.doi.org/10.2139/ssrn.1343428

Meijun Qian (Contact Author)

Australian National University (ANU) - College of Business and Economics ( email )

Canberra
Australia

Başak Tanyeri

Bilkent University ( email )

06533 Bilkent, Ankara
Turkey
903122901871 (Phone)

HOME PAGE: http://www.bilkent.edu.tr/~basak

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