Fallout from the Mutual Fund Trading Scandal

Posted: 7 Dec 2005

See all articles by Jay W. Wellman

Jay W. Wellman

Cornell University - School of Hotel Administration

Todd Houge

University of Iowa

Abstract

In September 2003, several prominent mutual fund companies came under investigation for illegal trading practices. Allegations suggested these funds allowed certain investors to profit from short-term trading schemes at the expense of other investors. Surprisingly, regulatory authorities have known for more than two decades of the potential for such abuses, yet have taken limited steps to correct the problem. We explore investor reaction to the scandal by measuring assets under management, stock returns, and performance. Mutual funds managed by investigated firms show a substantial decline in post-announcement assets under management. These firms also experienced significantly negative announcement-period returns. Finally, we discuss several policy suggestions to prevent future trading abuses and provide direction for future research.

Keywords: fair value pricing, late trading, market timing, mutual funds, redemption fees, scandal, trading abuse

JEL Classification: D63, G11, G14, G18, G23, G38, K22

Suggested Citation

Wellman, Jay W. and Houge, Todd, Fallout from the Mutual Fund Trading Scandal. Journal of Business Ethics, Vol. 62, pp. 129-139, 2005, Available at SSRN: https://ssrn.com/abstract=864286

Jay W. Wellman (Contact Author)

Cornell University - School of Hotel Administration ( email )

435B Statler Hall
Ithaca, NY 14853-6902
United States

Todd Houge

University of Iowa ( email )

Henry B. Tippie College of Business
Department of Finance, S288 PBB
Iowa City, IA 52242-1994
United States
319-335-3754 (Phone)
319-335-3690 (Fax)

HOME PAGE: http://www.biz.uiowa.edu/faculty/thouge

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