Investors’ Distraction and Strategic Re-Pricing Decisions

Posted: 8 May 2010

See all articles by Marco A. Navone

Marco A. Navone

Finance Discipline Group - UTS Business School; Bocconi University - CAREFIN - Centre for Applied Research in Finance; Financial Research Network (FIRN)

Date Written: February 1, 2010

Abstract

In this paper, I analyze re-pricing decisions for mutual fund management services. I derive measures of performance and price sensitivity and show that investors do not consider expense ratios simply as a negative component of expected returns: while performance sensitivity monotonically increases with past performance, price-sensitivity does not. Investors that buy top past-performers seems to be "distracted" by the fund previous return and pay relative little attention to expense ratios. Moreover price-sensitivity increases with fund visibility while performance sensitivity decreases, and while looking at data from 1980 to 2006 no discernible trend can be observed in the average performance sensitivity, price sensitivity strongly increases after 1990 due to the dramatic increase in the availability of mutual funds information for retail investors. Finally I show that investment companies strategically time their re-pricing decisions in order to exploit time variations in price and performance sensitivities.

This paper is currently reserved to Carefin sponsors and will be made public on SSRN after a short embargo. Please visit the CAREFIN website to learn more on how to get the paper.

Keywords: Mutual funds, expense ratios, price sensitivity

JEL Classification: G11, G23

Suggested Citation

Navone, Marco A., Investors’ Distraction and Strategic Re-Pricing Decisions (February 1, 2010). CAREFIN Research Paper No. 21/09, Available at SSRN: https://ssrn.com/abstract=1600158

Marco A. Navone (Contact Author)

Finance Discipline Group - UTS Business School ( email )

Haymarket
Sydney, NSW 2007
Australia

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Via Sarfatti, 25
Milan, 20136
Italy

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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