Abstract
I provide evidence showing that during the incubation period, mutual funds face less stringent limits of arbitrage constraints and payoff complementarities problems. I document that incubated funds hold more illiquid and less-popular securities and are better at buying stocks in the incubation period than after their Initial Public Off er (IPO). I also find that, after their IPO's, incubated funds tend to hold more illiquid stocks, hold more concentrated portfolios, invest in less-popular securities and are better at purchasing stocks than non-incubated funds. This shows that, even after the IPO, incubated funds have diff erent portfolio characteristics and stock picking abilities than non-incubated funds which is a sign that fund incubation is a way fund families utilize to innovate. I also show that fund families are strategic when choosing IPO dates for their incubated funds. Families tend to launch their incubated funds when their past performance is high, consistent with a inflow-maximizing behavior. However, I also show that, holding everything else constant, non-incubated funds attract higher inflows than incubated funds.
Published Version
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