Obfuscation in Mutual Funds

56 Pages Posted: 13 Mar 2020 Last revised: 12 Jul 2021

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

Massachusetts Institute of Technology (MIT) Sloan School of Management; Stanford University, Graduate School of Business, Students

Christina Zhu

University of Pennsylvania - The Wharton School

Date Written: July 8, 2021

Abstract

Mutual funds hold 32% of the U.S. equity market and comprise 58% of retirement savings, yet retail investors consistently make poor choices when selecting funds. Theory suggests poor choices are partially due to fund managers creating unnecessarily complex disclosures and fee structures to keep investors uninformed and obfuscate poor performance. An empirical challenge in investigating this “strategic obfuscation” theory is isolating manipulated complexity from complexity arising from inherent differences across funds. We examine obfuscation among S&P 500 index funds, which have largely the same regulations, risks, and gross returns but charge widely different fees. Using bespoke measures of complexity designed for mutual funds, we find evidence consistent with funds attempting to obfuscate high fees. This study improves our understanding of why investors make poor mutual fund choices and how price dispersion persists among homogeneous index funds. We also discuss insights for mutual fund regulation and academic literature on corporate disclosures.

An Online Appendix with supplementary materials is available at the following URL:
https://ssrn.com/abstract=3809981

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 Xie, Chloe and Zhu, Christina, Obfuscation in Mutual Funds (July 8, 2021). Journal of Accounting & Economics (JAE), Vol. 72, No. 2/3, 2021, 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

Massachusetts Institute of Technology (MIT) Sloan School of Management ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States

Christina Zhu

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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