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Measuring Innovation and Product Differentiation: Evidence from Mutual Funds
Author(s) -
KOSTOVETSKY LEONARD,
WARNER JEROLD B.
Publication year - 2020
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/jofi.12853
Subject(s) - uniqueness , prospectus , product (mathematics) , product differentiation , business , product innovation , prime (order theory) , monetary economics , economics , econometrics , financial economics , industrial organization , microeconomics , mathematics , finance , combinatorics , mathematical analysis , geometry , cournot competition
We study innovation and product differentiation using a uniqueness measure based on textual analysis of prospectuses. We find that small and start‐up families have higher start rates than larger families, and their products are more unique. Unique strategies attract more inflows in the first three years, and investors respond more to text‐based uniqueness than other measures such as holdings or returns uniqueness. For established funds, word uniqueness has weak negative power for explaining returns, so investors in competitive equilibrium do not sacrifice much performance to get specialized products. Uniqueness attenuates the flow‐performance relation, reducing the risk of investor outflows.