Changes in Mutual Fund Advisory Contracts

47 Pages Posted: 4 Nov 2005

See all articles by Jerold B. Warner

Jerold B. Warner

University of Rochester – Simon Business School

Joanna S. Wu

University of Rochester - Simon Business School

Date Written: October 31, 2005

Abstract

We examine changes in equity mutual funds' investment advisory contracts. Contracts generally pay the advisor a fee which is a percentage of the fund's total net assets. We find that high asset growth increases the likelihood of a contract change. Advisory rate changes occur in both directions and are substantial, with typical percentage fee shifts exceeding one-fourth. Our tests show that rate increases are associated with superior past market-adjusted fund performance, whereas rate decreases reflect economies of scale associated with growth. Fund and fund family market power variables also explain cross-sectional variation in the likelihood and magnitude of rate changes. We also provide new evidence on a fund's choice between linear and piece-wise linear advisory contracts and the likelihood of switches.

Suggested Citation

Warner, Jerold B. and Wu, Joanna, Changes in Mutual Fund Advisory Contracts (October 31, 2005). ; AFA 2007 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=841565 or http://dx.doi.org/10.2139/ssrn.841565

Jerold B. Warner

University of Rochester – Simon Business School ( email )

Carol Simon Hall 3-160H
Rochester, NY 14627
United States
585-275-2678 (Phone)
585-442-6323 (Fax)

Joanna Wu (Contact Author)

University of Rochester - Simon Business School ( email )

Carol Simon Hall 3-160D
Rochester, NY 14627
United States
585-275-5468 (Phone)
585-442-6323 (Fax)

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