Disclosure Obfuscation in Mutual Funds

57 Pages Posted: 13 Mar 2020

See all articles by Ed deHaan

Ed deHaan

University of Washington - Michael G. Foster School of Business

Yang Song

University of Washington - Michael G. Foster School of Business

Chloe Xie

Stanford University, Graduate School of Business, Students

Christina Zhu

University of Pennsylvania - The Wharton School

Date Written: February 18, 2020

Abstract

Mutual funds hold 31% of the U.S. equity market and comprise 61% of retirement savings, yet retail investors consistently make poor choices when selecting funds. Theory suggests that investors’ difficulty in choosing between funds is partially due to mutual fund managers creating unnecessarily complex disclosures to keep investors uninformed and obfuscate poor performance. An empirical challenge in investigating this “disclosure obfuscation” theory is isolating manipulated complexity from complexity arising from inherent differences across funds. We address this concern by examining disclosure obfuscation among S&P 500 index funds, which have largely the same risks and gross returns but charge widely different fees. Using bespoke measures designed specifically for mutual funds, we find evidence consistent with funds attempting to obfuscate high fees with unnecessarily complex disclosures. Our study improves our understanding of the role of disclosure in the mutual fund market, and of why price dispersion persists among homogenous index funds. We also discuss insights for mutual fund regulation and the academic literature on corporate disclosures.

Keywords: mutual funds; disclosure obfuscation; strategic disclosure; price dispersion; retail investors

JEL Classification: G11, G23, M41, D83, D14

Suggested Citation

deHaan, Ed and Song, Yang and Xie, Chloe and Zhu, Christina, Disclosure Obfuscation in Mutual Funds (February 18, 2020). Available at SSRN: https://ssrn.com/abstract=3540215 or http://dx.doi.org/10.2139/ssrn.3540215

Ed DeHaan (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Yang Song

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Chloe Xie

Stanford University, Graduate School of Business, Students ( email )

Stanford, CA
United States

Christina Zhu

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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