Mutual Fund Advisory Misconduct: Investor Flows and Company Reactions

63 Pages Posted: 13 Nov 2017 Last revised: 11 Aug 2020

See all articles by Bing Liang

Bing Liang

University of Massachusetts Amherst - Department of Finance

Yuying Sun

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Science

Kai Wu

Central University of Finance and Economics (CUFE) - School of Finance

Date Written: August 11, 2020

Abstract

We evaluate the economic consequences of mutual fund advisory misconduct from 2000 to 2015. An average of 31.25% reduction in monthly fund flows occurs in one year after the misconduct. The effect is more pronounced in funds facing strong investor monitoring. Although all types of misconduct have negative effects on sentiment-driven flows, only disclosure-related misconduct has negative effects on fundamental-driven flows. To respond, mutual funds raise marketing expenditures, reduce contractual incentives, impose stricter investment restrictions, hold more liquid assets, and replace malfeasant advisory firms subsequently. These measures alleviate the adverse effects of misconduct on investor flows. Overall, our study highlights the significant impact of misconduct on mutual fund flows and responsive policies in the mutual fund industry.

Keywords: investor monitoring; misconduct allegation; advisory contracting

JEL Classification: G02, G23, G28

Suggested Citation

Liang, Bing and Sun, Yuying and Wu, Kai, Mutual Fund Advisory Misconduct: Investor Flows and Company Reactions (August 11, 2020). Available at SSRN: https://ssrn.com/abstract=3061419 or http://dx.doi.org/10.2139/ssrn.3061419

Bing Liang

University of Massachusetts Amherst - Department of Finance ( email )

Amherst, MA 01003
United States

Yuying Sun

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Science ( email )

Beijing
China

Kai Wu (Contact Author)

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

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