Better Kept in the Dark? Portfolio Disclosure and Agency Problems in Mutual Funds

Abstract

We study the agency implications of increased disclosure using a regulatory change in the mutual fund industry as an experimental setting. This quasi-natural experiment mandated more frequent portfolio disclosure, which we show imposes managerial skill re-assessment risks from investors on funds with high relative performance volatility. In turn, this risk translates into greater agency costs to investors. We show that high, relative to low, volatility funds responded to the increased skill re-assessment risk post-regulation with an increase in management fees and a decrease in risk taking. These actions get transmitted to fund investors in the form of inferior net performance.

Keywords: Portfolio Disclosure, Agency Problems, Mutual Funds

JEL Classification: G00, G11, G20