Disclosure Decisions and Search Costs in the Mutual Fund Industry

Abstract

This paper examines empirically both the relationship between voluntary disclosures and investor search costs, and the concomitant effect of disclosure on the flow of funds to mutual funds. We examine the disclosure frequency, timeliness and details of the portfolio disclosures of a sample of retail S&P 500 Index Funds. Our results show that mutual funds provide more information voluntarily when investor search costs are high, after controlling for their demand for information. This finding makes the case for the role of search costs in investors' information acquisition, which was not previously documented in the empirical disclosure literature. We also examine, endogenously, the costs and benefits associated with mutual fund managers' voluntary disclosure decisions. We find that funds disclose less information when the proprietary costs of the voluntary disclosure are high. Our results also show that mutual funds disclose information more frequently when their inflow is relatively low.