Directors’ Ownership and Mutual Fund Flows

Abstract

Using hand-collected data around the first-time disclosure of directors’ ownership in U.S. mutual funds in 2002 as mandated by the SEC, I provide empirical evidence that investors value such ownership as a commitment to diligent monitoring. Flows into individual mutual funds following the disclosure are positively related to directors’ ownership, and various tests show that the flow response is unlikely a result of unobserved fund heterogeneity. Flows are more responsive to independent directors’ ownership than to interested directors’ ownership. Finally, directors’ ownership, as a governance mechanism, is particularly valued in those funds that lack alternative monitoring mechanisms, such as the presence of institutional investors.