Learning from Prospectuses

48 Pages Posted: 15 Jun 2021 Last revised: 19 Oct 2021

See all articles by Simona Abis

Simona Abis

Columbia University - Columbia Business School

Andrea M Buffa

University of Colorado at Boulder - Leeds School of Business

Apoorva Javadekar

Indian School of Business

Anton Lines

Columbia Business School

Date Written: September 2021

Abstract


We study qualitative information disclosures by mutual funds when investors learn from such disclosures in addition to past performance. We show theoretically that fund managers with specialized strategies optimally choose to disclose detailed strategy descriptions, while those with standardized strategies provide generic descriptions. Generic descriptions lead to benchmarking errors by investors who confuse factor returns and skill, resulting in higher fund flow volatility. While all managers dislike this volatility, those with above-average factor exposures also benefit from the errors on balance and thus grow larger. We find evidence for this trade-off in the data, using a comprehensive dataset of fund prospectuses: funds with more informative descriptions are larger and more specialized, exhibit lower flow-performance sensitivity, and show higher correlation between size and flow volatility. Investors in these funds make fewer benchmarking errors, and the effects are more pronounced for funds with shorter return histories.

Keywords: mutual funds, fund prospectus, information disclosure, fund benchmarks, machine learning

JEL Classification: G23, G11, D83

Suggested Citation

Abis, Simona and Buffa, Andrea M and Javadekar, Apoorva and Lines, Anton, Learning from Prospectuses (September 2021). Available at SSRN: https://ssrn.com/abstract=3865753 or http://dx.doi.org/10.2139/ssrn.3865753

Simona Abis

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

HOME PAGE: http://https://www8.gsb.columbia.edu/cbs-directory/detail/sa3518

Andrea M Buffa (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Apoorva Javadekar

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

Anton Lines

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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