Mutual Fund Size, Fund Family Size and Mutual Fund Performance: The Role of Selective Disclosure and Regulation FD
34 Pages Posted: 20 Feb 2010 Last revised: 11 Jun 2014
Using Regulation Fair Disclosure (Reg FD) as a point of structural change in the flow of selective information between firms and mutual funds, we examine whether the positive association between fund performance and fund family size is a result of selective access to information. Using two different research designs, we find that while fund family size was positively associated with fund performance in the period prior to Reg FD, this advantage has waned in the period subsequent to the regulation. We find that in the pre-Reg FD period funds that belonged to larger fund families displayed greater stock picking ability which disappeared subsequent to the regulation. This evidence suggests that the previously documented superior return of large fund families was the result of favored access rather than greater analytical skill or cost economies of scale. We also find that larger funds have poorer stock picking ability which suggests that the previously documented underperformance of large funds compared small funds could be attributable at least in part to a lower ability to pick the right stock. This evidence supports the liquidity hypothesis which suggests that large funds have to delve deeper to into the reservoir of ideas thereby generating lower returns.
Keywords: Mutual funds, Reg FD, Selective disclosure
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