Information Intermediaries and Financial Product Design: Evidence from Mutual Funds

Abstract

We show that information intermediaries affect financial product design by revealing information about product quality. Using mutual funds as a laboratory, we exploit the disclosure of initial Morningstar ratings, precisely when funds reach 36 months of history. Funds receiving low ratings, thereby revealed as low-quality, are 160% more likely to revise their prospectuses and increase product differentiation. Consistent with using strategic differentiation to mitigate the impact of a low-rating signal, these funds experience a 57% reduction in liquidation likelihood compared to their peers. Our findings highlight how intermediaries’ disclosures drive financial firms to redesign their products to shape investor demand.

Keywords: Product Differentiation, Mutual Funds, Industrial Organization, Textual Analysis, Ratings, Information Intermediaries

JEL Classification: G23, G11, L15, D22