#06-23
Whom Can you Trust? A Study of Mutual Fund Governance
Meijun Qian, October 2006
Abstract:
Investors in an open-end mutual fund can vote with their feet by withdrawing assets from
or adding assets to the fund. This paper examines the effectiveness of this market monitoring
mechanism in relation to the trading scandals erupted in 2003. With a sample of 92 fund families
and 10220 funds*classes I find that the probability of being indicted is higher for younger funds,
funds whose boards are excessively paid, and funds whose money flow is insensitive to past
returns. In funds with higher flow sensitivity, there are less stale pricing and less abnormal flows,
implying less opportunistic trading. These findings suggest that investors’ ability to withdraw
from or add assets to funds is an effective fund governance mechanism.
Keywords: Flow sensitivity, market monitoring, board of directors, trading practice.
JEL classifications : G23, G28.
