Effectiveness of mutual fund governance: Evidence from mutual funds that advertise.

摘要

This research aims to evaluate the effectiveness of governance mechanisms of mutual funds that engage in advertising activities. The problem associated with mutual fund advertising is that it potentially misleads investors about the funds' performance and deters investors from redeeming their shares. This problem largely arises from advertising effects on fund flows and the two mutual fund control mechanisms, namely, boards of directors and share redemptions. The existing literature suggests that share redemptions are not fully functioning and provides mixed results for effectiveness of mutual fund governance. The results of this study confirm existing literature that advertising brings in more money to advertised funds than a set of control group funds. Additional analyses provide that advertising types attract fund flows differently. The overall descending ranking order of advertising effectiveness is: Morningstar ratings, past performance and Lipper ratings. More interestingly, ranking of median director reputations for advertising types follows ranking of advertising effectiveness.;The analyses of governance effects on future flows show that reputations of the board of directors, represented by the average disinterested directors outside directorships, significantly attract new investments. Post-advertising adjusted returns analyses show that advertised funds do not underperform their counterparts in the aftermath. Rather, the advertised funds appear to consistently outperform the control group funds in every adjusted return measure as well as raw returns, though with weak statistic significance. The governance analyses also show that director reputations are positively associated with future returns. Positive relations between reputations and future flows and returns suggest that the boards of advertised funds do not allow fund managers to exploit investors and are effective in monitoring fund performance. Investors are able to reduce search costs by investing in advertised funds of good governance. This conclusion is consistent with evidence that advertised funds possess high credentialed directors and that investors value board quality as future fund flow is positively associated with the number of outside directorships of disinterested directors.