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Commonalities in investment strategy and the determinants of performance in mutual fund mergers

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  • Namvar, Ethan
  • Phillips, Blake

Abstract

This paper examines the determinants of cross-sectional variation in post-merger mutual fund performance. Mergers between funds with similar management objectives, as reflected by average portfolio book-to-market ratio, price–earnings ratio, beta and market capitalization values, outperform mergers between funds with dissimilar strategies. This superior performance transcends lower portfolio rebalancing costs which might be realized between merging funds which hold more assets in common. These results suggest that mutual fund mergers create collaborative benefits between funds with similar strategies. We also examine if fund governance structures influence the fund pairing process, testing if stronger fund oversight mitigates pairing mismatches. We find that less independent boards of trustees and boards with higher compensation are related to greater strategic mismatches between funds. These results suggest that more entrenched boards are more tolerant of fund mismatches which benefit the investment company, yet are not in investor’s best interests.

Suggested Citation

  • Namvar, Ethan & Phillips, Blake, 2013. "Commonalities in investment strategy and the determinants of performance in mutual fund mergers," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 625-635.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:625-635
    DOI: 10.1016/j.jbankfin.2012.10.001
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    References listed on IDEAS

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    1. 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.
    2. Russ Wermers, 2000. "Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses," Journal of Finance, American Finance Association, vol. 55(4), pages 1655-1703, August.
    3. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    4. Edwin J. Elton, 2001. "A First Look at the Accuracy of the CRSP Mutual Fund Database and a Comparison of the CRSP and Morningstar Mutual Fund Databases," Journal of Finance, American Finance Association, vol. 56(6), pages 2415-2430, December.
    5. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    6. Xinge Zhao, 2005. "Exit Decisions in the U.S. Mutual Fund Industry," The Journal of Business, University of Chicago Press, vol. 78(4), pages 1365-1402, July.
    7. Gerard Hoberg & Gordon Phillips, 2010. "Product Market Synergies and Competition in Mergers and Acquisitions: A Text-Based Analysis," Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3773-3811, October.
    8. Narayanan Jayaraman & Ajay Khorana & Edward Nelling, 2002. "An Analysis of the Determinants and Shareholder Wealth Effects of Mutual Fund Mergers," Journal of Finance, American Finance Association, vol. 57(3), pages 1521-1551, June.
    9. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
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    More about this item

    Keywords

    Mutual fund; Mutual fund merger; Mutual fund governance;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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