The Economic Consequences of Mutual Fund Advisory Misconduct
63 Pages Posted: 13 Nov 2017 Last revised: 20 Apr 2020
Date Written: April 16, 2020
We evaluate the economic consequences of mutual fund advisory misconduct from 2000-2015. An average of 31.25% reduction in monthly fund flows occurs in one year after misconduct. The effect is more pronounced in funds facing strong investor monitoring, regulatory oversight, and misconduct sanctions. The manual classification of misconduct allegations and flow decomposition show that although all types of misconduct have negative effects on sentiment-driven flows, only disclosure-related misconduct has a negative effect on the flows driven by the fundamental value of funds. Overall, our study highlights the role of misconduct in affecting fund flows in the mutual fund industry.
Keywords: Advisory misconduct; Investor monitoring; Misconduct allegation; Flow decomposition
JEL Classification: G02, G23, G28
Suggested Citation: Suggested Citation