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Copycat Funds: Information Disclosure Regulation and the Returns to Active Management in the Mutual Fund Industry

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Author Info

  • Frank, Mary Margaret
  • Poterba, James M
  • Shackelford, Douglas A
  • Shoven, John B

Abstract

Current regulations require mutual funds to disclose their portfolio holdings twice yearly. For actively managed funds, disclosure tells the public which assets the manager views as undervalued. If other investors can copy the actively managed funds' investments without affecting asset values, the return on the manager's research is diminished. If buying by "copycat" investors drives up the prices of assets held by the actively managed fund, however, then the disclosing fund may benefit. This paper provides empirical evidence on one of the costs of disclosure by estimating the returns of copycat mutual funds, which purchase the same assets as actively managed funds as soon as those asset holdings are disclosed. Our results for a limited sample of high-expense funds in the 1990s suggest that while these actively managed funds earned higher returns before expenses than their associated copycat funds, after expenses copycat funds earned statistically indistinguishable, and possibly higher, returns.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Law and Economics.

Volume (Year): 47 (2004)
Issue (Month): 2 (October)
Pages: 515-41

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Handle: RePEc:ucp:jlawec:y:2004:v:47:i:2:p:515-41

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Web page: http://www.journals.uchicago.edu/JLE/

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References

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  1. Josef Lakonishok & Andrei Shleifer & Richard Thaler & Robert Vishny, 1991. "Window Dressing by Pension Fund Managers," NBER Working Papers 3617, National Bureau of Economic Research, Inc.
  2. Mark M. Carhart & Ron Kaniel & David K. Musto & Adam V. Reed, 2002. "Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds," Journal of Finance, American Finance Association, vol. 57(2), pages 661-693, 04.
  3. Foster, George, 1980. " Externalities and Financial Reporting," Journal of Finance, American Finance Association, vol. 35(2), pages 521-33, May.
  4. Lerner, Josh, 1995. "Patenting in the Shadow of Competitors," Journal of Law and Economics, University of Chicago Press, vol. 38(2), pages 463-95, October.
  5. Admati, Anat R & Pfleiderer, Paul, 2000. "Forcing Firms to Talk: Financial Disclosure Regulation and Externalities," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 479-519.
  6. Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 179-194, April.
  7. David K. Musto, 1999. "Investment Decisions Depend on Portfolio Disclosures," Journal of Finance, American Finance Association, vol. 54(3), pages 935-952, 06.
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Cited by:
  1. Seung Hee Choi & Maneesh Chhabria, 2012. "Effective delays in portfolio disclosure," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 20(2), pages 196-211, May.
  2. Agarwal, Vikas & Gay, Gerald D. & Ling, Leng, 2012. "Performance inconsistency in mutual funds: An investigation of window-dressing behavior," CFR Working Papers 11-07 [rev.], University of Cologne, Centre for Financial Research (CFR).
  3. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2008. "Unobserved Actions of Mutual Funds," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2379-2416, November.
  4. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2004. "On the Industry Concentration of Actively Managed Equity Mutual Funds," NBER Working Papers 10770, National Bureau of Economic Research, Inc.
  5. Wermers, Russ & Yao, Tong & Zhao, Jane, 2007. "The investment value of mutual fund portfolio disclosure," CFR Working Papers 06-09, University of Cologne, Centre for Financial Research (CFR).
  6. Cici, Gjergji & Gibson, Scott & Moussawi, Rabih, 2010. "Mutual fund performance when parent firms simultaneously manage hedge funds," Journal of Financial Intermediation, Elsevier, vol. 19(2), pages 169-187, April.
  7. Elton, Edwin J. & Gruber, Martin J. & Blake, Christopher R. & Krasny, Yoel & Ozelge, Sadi O., 2010. "The effect of holdings data frequency on conclusions about mutual fund behavior," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 912-922, May.
  8. Agarwal, Vikas & Boyson, Nicole M. & Naik, Narayan Y., 2007. "Hedge funds for retail investors? An examination of hedged mutual funds," CFR Working Papers 07-04, University of Cologne, Centre for Financial Research (CFR).
  9. Larrymore, Norris L. & Rodriguez, Javier, 2007. "Active fund management: Global asset allocation funds," Journal of Multinational Financial Management, Elsevier, vol. 17(3), pages 244-256, July.
  10. Agarwal, Vikas & Jiang, Wei & Tang, Yuehua & Yang, Baozhong, 2011. "Uncovering hedge fund skill from the portfolio holdings they hide," CFR Working Papers 10-09 [rev.], University of Cologne, Centre for Financial Research (CFR).

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