Broken Promises, Competition, and Capital Allocation in the Mutual Fund Industry

93 Pages Posted: 24 May 2021 Last revised: 15 Sep 2023

See all articles by Simona Abis

Simona Abis

University of Colorado Boulder

Anton Lines

Columbia Business School

Date Written: August 10, 2023

Abstract

What characteristics of mutual funds do investors care about? In addition to performance and fees, we show that investors exhibit a clear preference for managers who adhere to the strategies they describe in their prospectuses. Capital flows respond negatively when funds diverge from the average holdings of their text-based strategy peer groups, but positively when they outperform those peer averages. We identify this effect using a novel instrumental variables approach, and show that funds face a delicate trade-off between keeping their promises and outperforming their peers who make similar promises.

Keywords: Mutual Fund Strategies, Prospectuses, Industrial Organization, Fund Flows, Machine Learning

JEL Classification: G11, G23, L10

Suggested Citation

Abis, Simona and Lines, Anton, Broken Promises, Competition, and Capital Allocation in the Mutual Fund Industry (August 10, 2023). Columbia Business School Research Paper No. 3851861, Available at SSRN: https://ssrn.com/abstract=3851861 or http://dx.doi.org/10.2139/ssrn.3851861

Simona Abis

University of Colorado Boulder ( email )

256 UCB
Boulder, CO CO 80300-0256
United States

Anton Lines (Contact Author)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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