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Information Pricing: The Evidence From Equity Mutual Funds
Author(s) -
Ciccotello Conrad S.,
Grant C. Terry
Publication year - 1996
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1996.tb00877.x
Subject(s) - business , mutual fund , equity (law) , offset (computer science) , closed end fund , stock (firearms) , finance , variable pricing , open end fund , actuarial science , financial economics , economics , institutional investor , marketing , computer science , mechanical engineering , corporate governance , political science , market liquidity , law , programming language , engineering
The theory of information pricing implies that the benefits from obtaining costly information should be offset by the costs. In the case of mutual funds, this theory suggests that trades by fund managers should take place at prices that compensate their clients for the managers' costs of becoming informed. This paper controls for risk, fund size, and age to assess the relationship of a fund's information costs to its performance. The findings show that stock funds charging the highest expenses generally earn returns insignificantly different from funds charging the lowest expenses. This lends support to the theory of information pricing. The findings are also indicative of an efficient market, given that information is costly.