Star Power: The Effect of Monrningstar Ratings on Mutual Fund Flow
AbstractMorningstar, Inc., has been hailed in both academic and practitioner circles as having the most influential rating system in the mutual fund industry. We investigate Morningstarâs influence by estimating the value of a star in terms of the asset flow it generates for the typical fund. We use event-study methods on a sample of 3,388 domestic equity mutual funds from November 1996 to October 1999 to isolate the âMorningstar effectâ from other influences on fund flow. ; We separately study initial rating events, whereby a fund is rated for the first time on its 36-month anniversary, and rating change events. An initial five-star rating results in average six-month abnormal flow of $26 million, or 53 percent above normal expected flow. Following rating changes, we find economically and statistically significant abnormal flow in the expected direction, positive for rating upgrades and negative for rating downgrades. Furthermore, we observe an immediate flow response, suggesting that some investors vigilantly monitor this information and view the rating change as ânewâ information on fund quality. Overall, our results indicate that Morningstar ratings have unique power to affect asset flow.
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Bibliographic InfoArticle provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.
Volume (Year): 43 (2008)
Issue (Month): 04 (December)
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Other versions of this item:
- Diane Del Guercio & Paula A. Tkac, 2001. "Star power: the effect of Morningstar ratings on mutual fund flows," Working Paper 2001-15, Federal Reserve Bank of Atlanta.
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