Out of Sight, Out of Mind: The Effects of Expenses on Mutual Fund Flows

36 Pages Posted: 3 May 2004  

Brad M. Barber

University of California, Davis

Terrance Odean

University of California, Berkeley - Haas School of Business

Lu Zheng

University of California, Irvine - Paul Merage School of Business

Date Written: December 2003

Abstract

We argue that the purchase decisions of mutual fund investors are influenced by salient, attention-grabbing information. Investors are more sensitive to salient in-your-face fees, like front-end loads and commissions, than operating expenses; they are likely to buy funds that attract their attention through exceptional performance, marketing, or advertising. Our empirical analysis of mutual fund flows over the last 30 years yields strong support for our contention. We find consistently negative relations between fund flows and front-end load fees. We also document a negative relation between fund flows and commissions charged by brokerage firms. In contrast, we find no relation (or a perverse positive relation) between operating expenses and fund flows. Additional analyses indicate that mutual fund marketing and advertising, the costs of which are often embedded in a fund's operating expenses, account for this surprising result.

Keywords: mutual funds, investor behavior, operating expenses

JEL Classification: G11, G18

Suggested Citation

Barber, Brad M. and Odean, Terrance and Zheng, Lu, Out of Sight, Out of Mind: The Effects of Expenses on Mutual Fund Flows (December 2003). Available at SSRN: https://ssrn.com/abstract=496315 or http://dx.doi.org/10.2139/ssrn.496315

Brad M. Barber (Contact Author)

University of California, Davis ( email )

Graduate School of Management
One Shields Avenue
Davis, CA 95616
United States
530-752-0512 (Phone)
530-752-2924 (Fax)

Terrance Odean

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-6767 (Phone)
510-666-2561 (Fax)

HOME PAGE: http://www.haas.berkeley.edu/faculty/odean.html

Lu Zheng

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States
9498248365 (Phone)

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