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

31 Pages Posted: 26 Jul 2010

See all articles by Molly Mercer

Molly Mercer

DePaul University

Alan R. Palmiter

Wake Forest University - School of Law

Ahmed E. Taha

Pepperdine University - Rick J. Caruso School of Law

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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 do not 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 do not persist — would be much more effective.

Suggested Citation

Mercer, Molly and Palmiter, Alan R. and Taha, Ahmed E., Worthless Warnings? Testing the Effectiveness of Disclaimers in Mutual Fund Advertisements. Journal of Empirical Legal Studies, Vol. 7, No. 3, pp. 429-459, September 2010, Available at SSRN: https://ssrn.com/abstract=1647241 or http://dx.doi.org/10.1111/j.1740-1461.2010.01184.x

Molly Mercer (Contact Author)

DePaul University ( email )

1 E Jackson Blvd Suite 6000
Chicago, IL 60604
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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 - Rick J. Caruso School of Law ( email )

24255 Pacific Coast Highway
Malibu, CA 90263
United States

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