Do Mutual Funds Walk the Talk? A Textual Analysis of Risk Disclosure by Mutual Funds

66 Pages Posted: 22 Mar 2021 Last revised: 31 Jan 2022

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: January 30, 2022

Abstract

Using textual analysis, we examine whether risk disclosures in funds’ summary prospectus reflect funds’ investment risks. We document the risks disclosed by funds and how they relate to academic risk factors. We then evaluate the relevance, conciseness and order of the risk disclosures. We find that disclosed risks explain about 50% of variations in fund returns; funds tend to overdisclose by reporting insignificant risks; the order of disclosure does not imply importance. We also find that funds improve their disclosure relevance after receiving SEC comment letters. We further explore the implications of risk disclosure for flow, risk taking and performance.

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? A Textual Analysis of Risk Disclosure by Mutual Funds (January 30, 2022). 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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