Measuring Innovation and Product Differentiation: Evidence from Mutual Funds

73 Pages Posted: 13 Jun 2016 Last revised: 21 Feb 2019

See all articles by Leonard Kostovetsky

Leonard Kostovetsky

Carroll School of Management, Boston College

Jerold B. Warner

University of Rochester – Simon Business School

Date Written: January 31, 2016

Abstract

We study innovation and product differentiation using a uniqueness measure based on textual analysis of prospectuses. We find that small and startup families have higher start rates than larger families and their products are more unique. Unique strategies attract more inflows in the first three years, and investors respond more to text-based uniqueness than other measures such as holdings or returns uniqueness. For established funds, word uniqueness has weak negative power for explaining returns, so investors in competitive equilibrium do not sacrifice much performance to get specialized products. Uniqueness attenuates the flow-performance relation, reducing the risk of investor outflows.

Keywords: Mutual Funds, Financial Innovation, Fund Flows, Product Differentiation, Competition

JEL Classification: G11, G23

Suggested Citation

Kostovetsky, Leonard and Warner, Jerold B., Measuring Innovation and Product Differentiation: Evidence from Mutual Funds (January 31, 2016). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2794380 or http://dx.doi.org/10.2139/ssrn.2794380

Leonard Kostovetsky (Contact Author)

Carroll School of Management, Boston College ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

Jerold B. Warner

University of Rochester – Simon Business School ( email )

Carol Simon Hall 3-160H
Rochester, NY 14627
United States
585-275-2678 (Phone)
585-442-6323 (Fax)

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