Changes in Mutual Fund Advisory Contracts
47 Pages Posted: 4 Nov 2005
Date Written: October 31, 2005
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.
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