Impact of Competition on Fund Disclosures and Consumer Search Costs

Abstract

This paper investigates the impact of competition in financial markets on the frequency of portfolio disclosures by mutual funds and its implications for consumer search costs. In a sample of open-end US domestic equity funds, it finds that voluntary disclosures decrease with market competition and this effect is amplified for funds holding illiquid assets. These results provide empirical support for the findings of Carlin et al. (2102). Mutual funds use voluntary portfolio disclosures as a marketing tool to attract new investments in a tournament-like market, where superior relative performance and greater visibility are rewarded with convex payoffs. With higher competition, the likelihood of receiving new investments goes down for each fund and funds respond by reducing costly voluntary disclosures. The disclosure costs are higher for funds holding illiquid assets and hence, the effect is stronger for them. Thus, competition appears to have an adverse impact on market transparency and hence, on consumer search costs in a tournament-like mutual fund market.