Why Do Mutual Fund Expenses Matter?

19 Pages Posted: 6 Sep 2012 Last revised: 30 Jul 2015

See all articles by David Nanigian

David Nanigian

San Diego State University - Fowler College of Business - Finance Department

Date Written: July 30, 2012

Abstract

This article develops a theory that the intensity of investor monitoring explains much of the relationship between expenses and performance. I instrument for investor monitoring through the use of minimum initial purchase data to test the theory. I find that the highly publicized negative expense-performance relationship disappears among funds that cater to a sophisticated clientele of investors. I find that mainstream investors can use the existence of a share class with a high minimum initial purchase requirement as a signal of competitiveness. My results highlight the important influence investor monitoring has on the competitiveness of financial products.

Keywords: Mutual funds, Mutual fund performance, Mutual fund fees, Mutual fund industry competition, Product quality, Investor sophistication, Monitoring, Principal-Agent relationships

JEL Classification: G02, G11, G23

Suggested Citation

Nanigian, David, Why Do Mutual Fund Expenses Matter? (July 30, 2012). Financial Services Review, Vol. 21, No. 3, 2012, Available at SSRN: https://ssrn.com/abstract=1977655 or http://dx.doi.org/10.2139/ssrn.1977655

David Nanigian (Contact Author)

San Diego State University - Fowler College of Business - Finance Department ( email )

5500 Campanile Drive
San Diego, CA 92182-8236
United States
213-545-1036 (Phone)

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