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Why Do Mutual Fund Advisory Contracts Change? Performance, Growth, and Spillover Effects
Author(s) -
WARNER JEROLD B.,
WU JOANNA SHUANG
Publication year - 2011
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2010.01632.x
Subject(s) - spillover effect , fund of funds , equity (law) , business , monetary economics , investment (military) , closed end fund , finance , economics , microeconomics , politics , market liquidity , political science , law
We examine changes in equity mutual funds' investment advisory contracts. We find substantial advisory compensation rate changes in both directions, with typical percentage fee shifts exceeding one‐fourth. Rate increases are associated with superior past market‐adjusted performance, whereas rate decreases reflect economies of scale associated with growth, and are not associated with extreme poor performance. There are within‐family spillover effects. Superior (e.g., star) performance for individual funds is associated with rate increases for a family's other funds. Rate reductions post‐2004 by family funds involved in market timing scandals do not have large industry spillover effects.