Disclosure Obfuscation in Mutual Funds
57 Pages Posted: 13 Mar 2020
Date Written: February 18, 2020
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
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