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

Journal of Empirical Legal Studies, September 2010

36 Pages Posted: 8 Apr 2010 Last revised: 8 Jul 2010

Molly Mercer

DePaul University

Alan R. Palmiter

Wake Forest University - School of Law

Ahmed E. Taha

Pepperdine University - School of Law

Multiple version iconThere are 2 versions of this paper

Date Written: April 8, 2010

Abstract

More than $11 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 suggests, 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, disclosure, warnings, disclaimers, regulation, advertising

JEL Classification: K22, M37, G23

Suggested Citation

Mercer, Molly and Palmiter, Alan R. and Taha, Ahmed E., Worthless Warnings? Testing the Effectiveness of Disclaimers in Mutual Fund Advertisements (April 8, 2010). Journal of Empirical Legal Studies, September 2010. Available at SSRN: https://ssrn.com/abstract=1586530

Molly Mercer (Contact Author)

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

Pepperdine University - School of Law ( email )

24255 Pacific Coast Highway
Malibu, CA 90263
United States

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