Who Incentivizes the Mutual Fund Manager, New or Old Shareholders?
Woodrow T. Johnson
U.S. Securities and Exchange Commission
March 30, 2009
AFA 2006 Boston Meetings Paper
Journal of Financial Intermediation, Vol. 19, No. 2, 2010
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.
Number of Pages in PDF File: 52
Keywords: Mutual funds, return-flow relationship, agency conflicts, investor behavior, governance
JEL Classification: G20, G30, D10
Date posted: March 17, 2005 ; Last revised: August 29, 2010