Do More Active Funds Still Earn Higher Performance? The Effect of Regulation Fair Disclosure

Abstract

We find that the relation between fund activeness and future performance significantly weakens after the passage of Regulation Fair Disclosure (Reg FD). The effect of Active Share on four-factor alpha is more than five times smaller after this regulatory change. More active funds embed a higher degree of private information into prices of traded stocks than their less active peers do, and the extent to which these funds affect price informativeness diminishes in the post-Reg FD era. Our findings suggest that one of the channels through which more active funds generated a higher alpha before Reg FD was through the selective disclosure of information.

Keywords: mutual funds; activeness; disclosure

JEL Classification: G11, G23