Mutual Fund Flows, Performance Persistence, and Board Quality

Abstract

This paper provides evidence on the impact of fund board quality on (a) the fund flow-performance relation, (b) persistence in fund performance, and (c) a fund's potential change of strategy following a period of underperformance. We use Morningstar's board quality ratings as a proxy for the quality of the fund's board and document three main results. One, we show that funds that rank in the bottom quintile of rankings based on past performance, experience significantly lower flows at the margin when their board quality rating is poor compared to when the board quality is rated as good. Two, we document a significant relationship between board quality and short-term performance persistence. For funds with bad boards, a negative past alpha predicts future negative alpha but the evidence of positive performance persistence is much weaker than for funds with good boards. Three, we show that a change in fund strategy following poor performance is more likely for funds with good boards compared to funds with bad boards. Our results suggest that measures of fund board quality contain valuable information with regard to a fund's incentives and strategy choice and hence are potentially useful for investor decision making.

Keywords: mutual fund flows, performance persistence, fund board quality

JEL Classification: G14, G20