The Impact of Scandals on Mutual Fund Performance, Money Flows and Fees

59 Pages Posted: 22 Jul 2014 Last revised: 10 Jun 2015

See all articles by Adrian Chapman-Davies

Adrian Chapman-Davies

UNSW Australia Business School, School of Banking and Finance

Jerry T. Parwada

UNSW Australia Business School, School of Banking and Finance; UNSW Business School; Financial Research Network (FIRN)

Eric K. M. Tan

University of Queensland - Business School

Date Written: July 29, 2014

Abstract

We examine the effects of fraud committed by mutual fund managers taking into account the dual responsibilities managers have for their employer firm and investors. Performance increases in the immediate aftermath of a scandal being reported, followed by a significant drop suggesting fund managers actively preempt the fallout from fraud disclosures. Investors who remain with a scandal fund under-perform by an average of 48 basis points in the subsequent year. Fraud is punished by reduced fund inflows to affected funds. Underperformance and money outflows are more severe with higher monetary fines, regulatory actions initiated by SEC, and the involvement of more than one regulatory body. Scandal funds reduce their expense ratios, possibly to retain and attract investors. This effort allows scandal funds to delay asset fire sales by up to a quarter. However, fund families reduce expenditure on marketing and distribution costs, likely to ameliorate the fallout from scandals by withdrawing affected funds from the limelight.

Keywords: Mutual funds, Regulation, Scandals, Performance, Money flows, Fund fees

JEL Classification: G23, G28

Suggested Citation

Chapman-Davies, Adrian and Parwada, Jerry T. and Tan, Eric K. M., The Impact of Scandals on Mutual Fund Performance, Money Flows and Fees (July 29, 2014). UNSW Business School Research Paper No. 2014 BFIN 20. Available at SSRN: https://ssrn.com/abstract=2468938 or http://dx.doi.org/10.2139/ssrn.2468938

Adrian Chapman-Davies

UNSW Australia Business School, School of Banking and Finance ( email )

UNSW Business School
School of Banking and Finance
Sydney, NSW 2052
Australia

Jerry T. Parwada (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

UNSW
Sydney, NSW 2052
Australia

HOME PAGE: http://www.firn.org.au

Eric K. M. Tan

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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