Abstract
In this paper, I study the impact of market competition on mutual fund marketing expenses. In a sample of US domestic equity mutual funds, I find that marketing expenses decrease with the competition. This effect is stronger for top-performing funds. These results are counterintuitive, as one would ordinarily expect funds to incur more marketing expenses in response to pressure from competing funds. However, these results support the narrative that mutual funds employ marketing to draw attention to their performance in a tournament-like market, where the top-performing funds (the winners) are rewarded with disproportionately high new investments. Higher competition decreases the chances of each fund to outperform the others and adversely affect their ability to attract new investments, and the funds respond by decreasing marketing expenses. Thus, competition appears to have implications for investor search cost.
Highlights
Brown et al (1996) show how the tournament-like competition in mutual fund markets affect managers’ portfolio decisions. Capon et al (1996) as well as Sirri and Tufano (1998) present evidence that investors put a lot of weight on the past performance of funds when making investment decisions. Sirri and Tufano (1998) find that investors base their fund purchase decisions on past performance asymmetrically, investing disproportionately more in funds that performed very well during the preceding period
I study the impact of competition in financial markets on the marketing expenses of mutual funds
The main hypothesis of the paper is that mutual funds rely on marketing to attract new investments in a market that often resembles a tournament
Summary
Brown et al (1996) show how the tournament-like competition in mutual fund markets affect managers’ portfolio decisions. Capon et al (1996) as well as Sirri and Tufano (1998) present evidence that investors put a lot of weight on the past performance of funds when making investment decisions. Sirri and Tufano (1998) find that investors base their fund purchase decisions on past performance asymmetrically, investing disproportionately more in funds that performed very well during the preceding period. It is reasonable to assume that fund managers take into account both the tournament nature of the fund market competition and the benefits of reducing search cost while deciding on a level of marketing expenses They will spend on marketing as long as they expect to profit from it, in terms of receiving a share of the new investments. In this context, it will be interesting to study the impact of market competition on the level of fund marketing expenses, as it has implications for investors search. I find evidence that competition affects the marketing policies of mutual funds adversely These results are interesting because they suggest that competition may hinder market transparency in financial markets, and may add to the investor search cost. The paper is structured as follows: Section 2 formulates the hypotheses, Section 3 describes the data and methodology, Section 4 provides the summary statistics, Section 5 presents the empirical analysis, Section 6 carries out the robustness analysis, and Section 7 concludes the study
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