Measuring Innovation and Product Differentiation: Evidence from Mutual Funds
73 Pages Posted: 13 Jun 2016 Last revised: 21 Feb 2019
Date Written: January 31, 2016
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: Suggested Citation