Litigations and Mutual Fund Runs
Australian National University (ANU) - College of Business and Economics
Melbourne Business School, 2016 Financial Institutions, Regulation & Corporate Governance (FIRCG) Conference
This paper investigates whether anticipation of adverse events (litigations over market-timing and late-trading) can trigger runs in mutual funds. We find that runs start as early as four months before litigation announcements. The pre-event runs over a six-month window accumulate to 4.95% of total net assets and post-event runs last over two years and accumulate to 7.94% for the first six months window. Additionally, investors who run before litigation announcements earn significantly higher risk- and peer-adjusted returns, as high as 1.16% more than those who run after. The difference in returns is particularly high for funds holding illiquid assets. Our analysis suggests that a pro-rata ownership design does not suffice to prevent runs in mutual funds.
Number of Pages in PDF File: 33
Keywords: Mutual fund flows, runs, and returns
JEL Classification: G23, G14
Date posted: February 22, 2016 ; Last revised: February 23, 2016