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Star rating, fund flows and performance predictability: evidence from Norway

Author

Listed:
  • Linn K. Aasheim

    (ISCTE–Instituto Universitário de Lisboa (ISCTE–IUL))

  • António F. Miguel

    (ISCTE–Instituto Universitário de Lisboa (ISCTE–IUL)
    Business Research Unit (BRU–IUL))

  • Sofia B. Ramos

    (ESSEC Business School)

Abstract

This paper studies the effect of Morningstar ratings on fund flows and fund performance predictability using a proprietary data set of equity funds from Norway. Controlling for a number of variables proxying for fund and firm visibility, we find that fund flows respond asymmetrically to changes in Morningstar ratings. Specifically, 4- and 5-star rated funds get more flows, and funds upgraded to 5-star get significantly more flows not only in the next month, but also over the following 12 months after the rating change. Downgraded funds suffer outflows, but the results only become statistically significant when fund performance falls to a 2-star rating. We also find evidence of long-term performance predictability for top-rated funds. As the mutual fund industry develops worldwide, our results suggest that Morningstar has been successful in bringing its brand name to markets outside the USA, and that Morningstar ratings are a valuable tool for helping investors make strong investment decisions.

Suggested Citation

  • Linn K. Aasheim & António F. Miguel & Sofia B. Ramos, 2022. "Star rating, fund flows and performance predictability: evidence from Norway," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(1), pages 29-56, March.
    • Handle: RePEc:kap:fmktpm:v:36:y:2022:i:1:d:10.1007_s11408-021-00390-8
    DOI: 10.1007/s11408-021-00390-8
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    More about this item

    Keywords

    Mutual funds; Morningstar ratings; Fund flows; Fund performance; Investor behavior;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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