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The ABCs of mutual funds: On the introduction of multiple share classes

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  • Nanda, Vikram K.
  • Wang, Z. Jay
  • Zheng, Lu

Abstract

We study a significant innovation with widespread consequences for the mutual fund industry: the introduction of multiple-class funds that give investors a choice among alternative load and fee structures. The transition to a multiple-class structure represents an important step in the evolution of the mutual fund industry. It also provides a well-controlled setting for research on the structure of funds, on investor clienteles and their impact on fund performance and, more generally, about the manner in which financial innovations tend to be adopted. We develop a simple model of a fund's decision on whether and when to introduce new classes and empirically investigate the model's predictions that: (a) Funds with more skilled management, less sensitivity of flows to performance, smaller size, higher existing loads and membership in larger families are better positioned to benefit and, therefore, more likely to switch to a multiple-class structure earlier; (b) The new classes increase the level and volatility of fund inflow by attracting investors with short and uncertain investment horizons - which, in turn, can negatively impact fund performance. Our empirical results are generally supportive of the model's predictions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 18 (2009)
Issue (Month): 3 (July)
Pages: 329-361

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Handle: RePEc:eee:jfinin:v:18:y:2009:i:3:p:329-361

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Web page: http://www.elsevier.com/locate/inca/622875

Related research

Keywords: Mutual funds Distribution channels Investor clienteles Fund flows Fund performance;

References

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Citations

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Cited by:
  1. Chalmers, John & Kaul, Aditya & Phillips, Blake, 2013. "The wisdom of crowds: Mutual fund investors’ aggregate asset allocation decisions," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3318-3333.
  2. Navone, Marco, 2012. "Reprint of Investors’ distraction and strategic repricing decisions," Journal of Banking & Finance, Elsevier, vol. 36(10), pages 2729-2741.
  3. Adams, John C. & Mansi, Sattar A. & Nishikawa, Takeshi, 2012. "Are mutual fund fees excessive?," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2245-2259.
  4. Gavazza, Alessandro, 2011. "Demand Spillovers and Market Outcomes in the Mutual Fund Industry," MPRA Paper 30074, University Library of Munich, Germany.
  5. Navone, Marco, 2012. "Investors’ distraction and strategic repricing decisions," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1291-1303.
  6. Cashman, George D., 2010. "Pay-performance sensitivity and firm size: Insights from the mutual fund industry," Journal of Corporate Finance, Elsevier, vol. 16(4), pages 400-412, September.
  7. Iannotta, Giuliano & Navone, Marco, 2012. "The cross-section of mutual fund fee dispersion," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 846-856.
  8. Eric Fricke, 2013. "Board compensation, holdings and mutual fund expense ratios," Managerial Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 39(3), pages 228-250, February.

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