Worthless Warnings? Testing the Effectiveness of Disclaimers in Mutual Fund Advertisements

35 Pages Posted: 14 Jul 2009 Last revised: 18 Sep 2009

Molly Mercer

DePaul University

Alan R. Palmiter

Wake Forest University - School of Law

Ahmed E. Taha

Pepperdine University - School of Law

Date Written: July 13, 2009

Abstract

Approximately $10 trillion is invested in mutual funds in the United States. Mutual fund investors flock to funds with high past returns, despite there being little, if any, relationship between high past returns and high future returns. Because fund management fees are based on the amount of assets invested in their funds, however, fund companies regularly advertise the returns of their high-performing funds. The SEC requires these advertisements to contain a disclaimer warning that past returns don’t guarantee future returns and that investors could lose money in the funds. This article presents the results of an experiment that finds that this SEC-mandated disclaimer is completely ineffective. The disclaimer neither reduces investors’ propensity to invest in advertised funds nor diminishes their expectations regarding the funds’ future returns. The experiment also finds, however, that a stronger disclaimer – one that informs investors that high fund returns generally don’t persist – would be much more effective.

Keywords: mutual funds, securities, advertising, warnings, disclaimers, securities regulation

JEL Classification: G23, G28, K22, M37

Suggested Citation

Mercer, Molly and Palmiter, Alan R. and Taha, Ahmed E., Worthless Warnings? Testing the Effectiveness of Disclaimers in Mutual Fund Advertisements (July 13, 2009). CELS 2009 4th Annual Conference on Empirical Legal Studies Paper. Available at SSRN: https://ssrn.com/abstract=1433432 or http://dx.doi.org/10.2139/ssrn.1433432

Molly Mercer

DePaul University ( email )

Chicago, IL 60604
United States
(312)362-8956 (Phone)

HOME PAGE: http://samson.comtech.depaul.edu/faculty/member/Molly/Mercer/

Alan R. Palmiter

Wake Forest University - School of Law ( email )

P.O. Box 7206
Winston-Salem, NC 27109
United States
336-758-5711 (Phone)
336-758-4496 (Fax)

Ahmed E. Taha (Contact Author)

Pepperdine University - School of Law ( email )

24255 Pacific Coast Highway
Malibu, CA 90263
United States

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