Learning from Prospectuses

41 Pages Posted: 15 Jun 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: June 2021

Abstract

We study qualitative information disclosure by mutual funds when investors learn from these disclosures in addition to past performance. We show theoretically that fund managers with specialized strategies optimally choose to disclose detailed strategy descriptions, while managers with standardized strategies provide generic descriptions. Generic descriptions lead to errors in benchmarking by investors and thus higher volatility in capital flows. While all fund managers dislike such volatility, those with above-average factor exposures also benefit from benchmarking errors as investors incorrectly ascribe factor returns to managerial skill. The model generates a number of predictions that we are able to test empirically using a comprehensive dataset of fund prospectuses. Consistent with the model’s predictions, funds with standardized strategies include more boilerplate in their descriptions, grow larger and have lower flow-performance sensitivity, despite having greater flow volatility.

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 (June 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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