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Star power: the effect of Morningstar ratings on mutual fund flows


  • Diane Del Guercio
  • Paula A. Tkac


Morningstar, Inc., has been hailed in both academic and practitioner circles as having the most influential rating system in the mutual fund industry. We investigate Morningstar’s influence by estimating the value of a star in terms of the asset flow it generates for the typical fund. We use event-study methods on a sample of 3,388 domestic equity mutual funds from November 1996 to October 1999 to isolate the “Morningstar effect” from other influences on fund flow. ; We separately study initial rating events, whereby a fund is rated for the first time on its 36-month anniversary, and rating change events. An initial five-star rating results in average six-month abnormal flow of $26 million, or 53 percent above normal expected flow. Following rating changes, we find economically and statistically significant abnormal flow in the expected direction, positive for rating upgrades and negative for rating downgrades. Furthermore, we observe an immediate flow response, suggesting that some investors vigilantly monitor this information and view the rating change as “new” information on fund quality. Overall, our results indicate that Morningstar ratings have unique power to affect asset flow.

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  • Diane Del Guercio & Paula A. Tkac, 2001. "Star power: the effect of Morningstar ratings on mutual fund flows," FRB Atlanta Working Paper 2001-15, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2001-15

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    1. Brown, Stephen J & Goetzmann, William N, 1995. " Performance Persistence," Journal of Finance, American Finance Association, vol. 50(2), pages 679-698, June.
    2. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    3. Blake, Christopher R. & Morey, Matthew R., 2000. "Morningstar Ratings and Mutual Fund Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(03), pages 451-483, September.
    4. Boehmer, Ekkehart & Masumeci, Jim & Poulsen, Annette B., 1991. "Event-study methodology under conditions of event-induced variance," Journal of Financial Economics, Elsevier, vol. 30(2), pages 253-272, December.
    5. Bergstresser, Daniel & Poterba, James, 2002. "Do after-tax returns affect mutual fund inflows?," Journal of Financial Economics, Elsevier, vol. 63(3), pages 381-414, March.
    6. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. " Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March.
    7. Prem C. Jain & Joanna Shuang Wu, 2000. "Truth in Mutual Fund Advertising: Evidence on Future Performance and Fund Flows," Journal of Finance, American Finance Association, vol. 55(2), pages 937-958, April.
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    Mutual funds;

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