Strategic Behavior Surrounding Sales of Mutual-Fund Management Companies

Abstract

Predictable fund performance patterns surrounding mutual-fund management company sales suggest joint and strategic fund performance management. Consistent with a simple model we develop, return patterns in the period leading to the sale point to a decline in the cross-subsidization of star performers and an increase in the cross-subsidization of dud performers. The return patterns are more pronounced among funds with higher flow-performance sensitivity and fund management companies that engage in cross-trades. This paper is the first to document the event-driven dynamic nature of strategic cross-subsidization in the mutual-fund industry.

Keywords: Mutual fund families, mutual fund management companies, strategic behavior

JEL Classification: G2, G20, G23