Financial Product Incentives to Differentiate: Evidence from Mutual Funds

82 Pages Posted: 11 Oct 2021 Last revised: 1 Mar 2024

See all articles by Maxime Bonelli

Maxime Bonelli

London Business School - Department of Finance

Anastasia Buyalskaya

HEC Paris

Tianhao Yao

Singapore Management University

Date Written: October 8, 2021

Abstract

We investigate the strategic behavior of financial products in differentiating beyond performance, using mutual funds as our laboratory. We provide evidence consistent with low-performing funds strategically using product differentiation, reflected in more unique fund prospectuses, to compete for customers by offering more niche products. Exploiting the issuance of Morningstar ratings as a shock to perceived quality, we establish a causal link between low quality and increased differentiation. Funds receiving a low rating actively change their prospectuses, increasing their product differentiation, which improves their survival likelihood. Much like other consumer products, mutual funds strategically pursue product differentiation to soften quality-based competition.

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

JEL Classification: G23, G11, D83, L1

Suggested Citation

Bonelli, Maxime and Buyalskaya, Anastasia and Yao, Tianhao, Financial Product Incentives to Differentiate: Evidence from Mutual Funds (October 8, 2021). HEC Paris Research Paper No. FIN-2021-1428, Available at SSRN: https://ssrn.com/abstract=3939239 or http://dx.doi.org/10.2139/ssrn.3939239

Maxime Bonelli (Contact Author)

London Business School - Department of Finance ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Anastasia Buyalskaya

HEC Paris ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Tianhao Yao

Singapore Management University ( email )

Singapore
Singapore

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