Is "voting with your feet" an effective mutual fund governance mechanism?
Investors in open-end mutual funds can vote with their feet by withdrawing assets from or adding assets to these funds. This paper assesses the effectiveness of this market discipline mechanism by investigating whether voting with the feet prevents the abusive practices that led to the 2003-2004 trading scandals. The research results indicate that funds with higher flow sensitivity--that is, a higher density of vigilant clients--have lower arbitrage potential and fewer abnormal flows, which in turn implies less opportunistic trading. As a result, these funds have a lower probability of being implicated in scandals. These findings suggest that investor ability to withdraw assets from or add assets to the funds is an effective mutual fund governance mechanism. In funds with less sophisticated investors who cannot use this option, other means of governance are especially important.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rahul Bhargava & Ann Bose & David A. Dubofsky, 1998. "Exploiting International Stock Market Correlations with Open-end International Mutual Funds," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(5&6), pages 765-773.
- Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
- Cremers, Martijn & Driessen, Joost & Maenhout, Pascal & Weinbaum, David, 2009.
"Does Skin in the Game Matter? Director Incentives and Governance in the Mutual Fund Industry,"
Journal of Financial and Quantitative Analysis,
Cambridge University Press, vol. 44(06), pages 1345-1373, December.
- Martijn Cremers & Joost Driessen & Pascal Maenhout & David Weinbaum, 2005. "Does Skin in the Game Matter? Director Incentives and Governance in the Mutual Fund Industry," Yale School of Management Working Papers amz2470, Yale School of Management, revised 01 Nov 2008.
- Ippolito, Richard A, 1992. "Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry," Journal of Law and Economics, University of Chicago Press, vol. 35(1), pages 45-70, April.
- Lu Zheng, 1999. "Is Money Smart? A Study of Mutual Fund Investors' Fund Selection Ability," Journal of Finance, American Finance Association, vol. 54(3), pages 901-933, 06.
- Susan Christoffersen & David K. Musto, 1999.
"Demand Curves and the Pricing of Money Management,"
Center for Financial Institutions Working Papers
99-31, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Eric Zitzewitz, 2005.
"How Widespread is Late Trading in Mutual Funds?,"
- Del Guercio, Diane & Dann, Larry Y. & Partch, M. Megan, 2003. "Governance and boards of directors in closed-end investment companies," Journal of Financial Economics, Elsevier, vol. 69(1), pages 111-152, July.
- Khorana, Ajay & Tufano, Peter & Wedge, Lei, 2007. "Board structure, mergers, and shareholder wealth: A study of the mutual fund industry," Journal of Financial Economics, Elsevier, vol. 85(2), pages 571-598, August.
- James, Christopher & Karceski, Jason, 2006. "Investor monitoring and differences in mutual fund performance," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2787-2808, October.
- Goetzmann, William N. & Ivković, Zoran & Rouwenhorst, K. Geert, 2001.
"Day Trading International Mutual Funds: Evidence and Policy Solutions,"
Journal of Financial and Quantitative Analysis,
Cambridge University Press, vol. 36(03), pages 287-309, September.
- William Goetzmann & Zoran Ivkovich & K. Rouwenhorst, 2000. "Day Trading International Mutual Funds: Evidence And Policy Solutions," Yale School of Management Working Papers ysm138, Yale School of Management, revised 01 Jun 2001.
- Qi Chen & Itay Goldstein & Wei Jiang, 2008. "Directors' Ownership in the U.S. Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 63(6), pages 2629-2677, December.
- Tufano, Peter & Sevick, Matthew, 1997. "Board structure and fee-setting in the U.S. mutual fund industry," Journal of Financial Economics, Elsevier, vol. 46(3), pages 321-355, December.
- Edelen, Roger M. & Warner, Jerold B., 2001. "Aggregate price effects of institutional trading: a study of mutual fund flow and market returns," Journal of Financial Economics, Elsevier, vol. 59(2), pages 195-220, February.
- Harold Mulherin, J., 2007. "Measuring the costs and benefits of regulation: Conceptual issues in securities markets," Journal of Corporate Finance, Elsevier, vol. 13(2-3), pages 421-437, June.
- Ferris, Stephen P. & Yan, Xuemin (Sterling), 2007. "Do independent directors and chairmen matter? The role of boards of directors in mutual fund governance," Journal of Corporate Finance, Elsevier, vol. 13(2-3), pages 392-420, June.
- Thomas Dangl & Youchang Wu & Josef Zechner, 2008. "Market Discipline and Internal Governance in the Mutual Fund Industry," Review of Financial Studies, Society for Financial Studies, vol. 21(5), pages 2307-2343, September.
- Diane Del Guercio & Paula A. Tkac, 2000. "The determinants of the flow of funds of managed portfolios: mutual funds versus pension funds," FRB Atlanta Working Paper 2000-21, Federal Reserve Bank of Atlanta.
- Smith, Janet Kiholm, 2007. "Evaluating the boundaries of SEC regulation," Journal of Corporate Finance, Elsevier, vol. 13(2-3), pages 189-194, June.
When requesting a correction, please mention this item's handle: RePEc:eee:corfin:v:17:y:2011:i:1:p:45-61. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.