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Out of Sight, Out of Mind: The Effects of Expenses on Mutual Fund Flows

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Listed:
  • Brad M. Barber

    (Graduate School of Management, University of California, Davis)

  • Terrance Odean

    (Haas School of Management, University of California, Berkeley)

  • Lu Zheng

    (Ross School of Business, University of Michigan)

Abstract

We argue that the purchase decisions of mutual fund investors are influenced by salient, attention-grabbing information. Investors are more sensitive to salient, in-your-face fees, like front-end loads and commissions, than operating expenses; they buy funds that attract their attention through exceptional performance, marketing, or advertising. We analyze mutual fund flows over the last 30 years and find negative relations between flows and front-end-load fees. In contrast, we find no relation between operating expenses and flows. Additional analyses indicate that marketing and advertising, the costs of which are often embedded in funds' operating expenses, account for this surprising result.

Suggested Citation

  • Brad M. Barber & Terrance Odean & Lu Zheng, 2005. "Out of Sight, Out of Mind: The Effects of Expenses on Mutual Fund Flows," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2095-2120, November.
  • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:6:p:2095-2120
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