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The Dilution Impact of Daily Fund Flows on Open-end Mutual Funds

52 Pages Posted: 23 Mar 2000  

Jason T. Greene

The University of Alabama in Huntsville

Charles W. Hodges

University of West Georgia; Southern Illinois University at Carbondale - Department of Finance; Georgia State University - Department of Finance

Date Written: February 11, 2000

Abstract

We examine how fund flows that are correlated with subsequent fund returns can impact the performance of open-end mutual fund through a dilution effect. Since these flows tend to put cash into a fund just prior to positive returns on the fund?s risky assets, the cash dilutes the fund?s return. Our analysis reveals that active trading of open-end funds occurs and has a meaningful economic effect on the passive, non-trading shareholders in the fund. While in the overall sample of domestic equity funds we find no dilution impact from daily fund flows, we estimate an annualized benefit of nearly 5 basis points in low-flow funds. In examining the fund flows in international funds, we find an overall annualized negative impact of 0.48%. For the sub-sample of funds in which flows are particularly large, this negative impact is nearly 1% per year. Our results suggest that the structure and design of mutual funds, such as exchange and pricing policies, can have important performance-related implications independent of the value added by the portfolio manager.

JEL Classification: G1, G10

Suggested Citation

Greene, Jason T. and Hodges, Charles W., The Dilution Impact of Daily Fund Flows on Open-end Mutual Funds (February 11, 2000). Available at SSRN: https://ssrn.com/abstract=215968 or http://dx.doi.org/10.2139/ssrn.215968

Jason T. Greene (Contact Author)

The University of Alabama in Huntsville ( email )

301 Sparkman Drive
Huntsville, AL 35899
United States
256-824-4424 (Phone)

HOME PAGE: http://www.uah.edu/business

Charles W. Hodges

University of West Georgia ( email )

Department of Accounting and Finance
Richards College of Business
Carrollton, GA 30118
United States
(770) 836-4816 (Phone)

Southern Illinois University at Carbondale - Department of Finance ( email )

Mail Code 4626
Carbondale, IL 62901-4626
United States

Georgia State University - Department of Finance ( email )

University Plaza
Atlanta, GA 30303-3083
United States
404-651-2691 (Phone)
404-651-2630 (Fax)

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