Capital Commitment and Investment Decisions: The Role of Mutual Fund Charges
59 Pages Posted: 6 Apr 2019 Last revised: 19 Feb 2020
Date Written: July 4, 2019
Many investors purchase open-end mutual funds through intermediaries, paying brokers and financial advisors for fund distribution and advice. We argue these intermediaries can extract valuable information about the investment horizon of their clients. That allows portfolio managers to manage liquidity more efficiently, and to improve performance by timely matching their investment choices to the underlying investment horizon of their investors. Mutual funds with more committed capital hold shares longer, invest in more illiquid stocks, and take advantage of securities with slow-moving arbitrage opportunities, i.e., fire-sale stocks, and R&D-intensive stocks. This evidence reveals an overlooked shadow cost of disintermediation in the mutual fund industry.
Keywords: mutual fund, intermediaries, investment horizon, liquidity management, fee structure
JEL Classification: G11, G23, J33, J44, L22, L25, L84, M12, M52
Suggested Citation: Suggested Citation