Why Do Mutual Fund Expenses Matter?
19 Pages Posted: 6 Sep 2012 Last revised: 30 Jul 2015
Date Written: July 30, 2012
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: Suggested Citation