Do Mutual Funds Walk the Talk? Evidence from Fund Risk Disclosure

85 Pages Posted: 22 Mar 2021 Last revised: 19 Oct 2023

See all articles by Jinfei Sheng

Jinfei Sheng

University of California, Irvine - Paul Merage School of Business

Nan Xu

Nankai University - School of Finance

Lu Zheng

University of California, Irvine - Paul Merage School of Business

Date Written: October 17, 2023

Abstract

We examine the accuracy of mutual fund risk disclosure using the Risk Coverage Ratio (RCR), comparing the explanatory power of risks disclosed by a fund to that of all risks disclosed by all funds. Excluding market risk, the average fund RCR is 55%; RCR drops to 26% when we exclude information contained in fund names. RCR is positively related to flows from institutional investors. However, RCR correlates with lower future fund performance, suggesting costs associated with revealing private information. Notably, 56% of disclosed risks are insignificant, indicating overdisclosure. Funds improve the informativeness of risk disclosure after receiving SEC comment letters.

Keywords: Mutual funds, risk, disclosure, textual analysis, information, prospectus, performance, flow

JEL Classification: G11, G23

Suggested Citation

Sheng, Jinfei and Xu, Nan and Zheng, Lu, Do Mutual Funds Walk the Talk? Evidence from Fund Risk Disclosure (October 17, 2023). Available at SSRN: https://ssrn.com/abstract=3757077 or http://dx.doi.org/10.2139/ssrn.3757077

Jinfei Sheng

University of California, Irvine - Paul Merage School of Business ( email )

4291 Pereira Drive
Irvine, CA 92697
United States

HOME PAGE: http://sites.google.com/site/shengjinfei/

Nan Xu

Nankai University - School of Finance ( email )

38 Tongyan Road, Jinnan District
Tianjin, Tianjin 300350
China

Lu Zheng (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
9498248365 (Phone)

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