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). Simon School Working Paper No. FR 05-14, 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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