Who Incentivizes the Mutual Fund Manager, New or Old Shareholders?

52 Pages Posted: 17 Mar 2005 Last revised: 29 Aug 2010

See all articles by Woodrow T. Johnson

Woodrow T. Johnson

U.S. Securities and Exchange Commission

Date Written: March 30, 2009


This study tests whether mutual fund shareholders continue to trade in response to fund returns after they make their initial investment in fund shares. It decomposes the relationship between fund returns and shareholder flow in a large, proprietary panel of all shareholder transactions in one midsize no-load mutual fund family. Results show that both new and old shareholders buy shares during periods of good returns; however, shareholder outflow is essentially unrelated to fund returns. This lack of a return-sell relationship is not driven by locked-in pension assets, shareholders' ignorance of ongoing fund returns, or embedded capital gains. However, there is evidence that exchanges between equity funds in the family are more correlated with returns of the destination fund than with returns of the origination fund. This may indicate that flow between equity mutual funds is driven by shareholders buying new funds rather than selling old funds. Shareholders who invest through mutual fund supermarkets are more likely than the typical shareholder to exchange into funds that have high future returns.

Keywords: Mutual funds, return-flow relationship, agency conflicts, investor behavior, governance

JEL Classification: G20, G30, D10

Suggested Citation

Johnson, Woodrow T., Who Incentivizes the Mutual Fund Manager, New or Old Shareholders? (March 30, 2009). AFA 2006 Boston Meetings Paper, Journal of Financial Intermediation, Vol. 19, No. 2, 2010, Available at SSRN: https://ssrn.com/abstract=687547 or http://dx.doi.org/10.2139/ssrn.687547

Woodrow T. Johnson (Contact Author)

U.S. Securities and Exchange Commission ( email )

100 F Street, NE
Washington, DC 20549-9360
United States
202-551-6611 (Phone)

HOME PAGE: http://www.sec.gov/about/economic.shtml

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