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

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

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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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
Contact details of provider: Web page: http://www.journals.uchicago.edu/JLE/

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  1. 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.
  2. 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.
  3. David K. Musto, 1999. "Investment Decisions Depend on Portfolio Disclosures," Journal of Finance, American Finance Association, vol. 54(3), pages 935-952, 06.
  4. Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 179-194, April.
  5. Lakonishok, Josef, et al, 1991. "Window Dressing by Pension Fund Managers," American Economic Review, American Economic Association, vol. 81(2), pages 227-31, May.
  6. 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.
  7. Foster, George, 1980. " Externalities and Financial Reporting," Journal of Finance, American Finance Association, vol. 35(2), pages 521-33, May.
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