#07-16
Payoff Complementarities and Financial Fragility: Evidence from Mutual Fund Outflows
Qi Chen, Itay Goldstein and Wei Jiang, October 2006
Abstract: It is often argued that strategic complementarities generate financial fragility. Finding empirical
evidence, however, has been a challenge. We derive empirical implications from a global-game
model and test them using data on mutual fund outflows. Consistent with the theory, we find
that conditional on low past performance, funds with illiquid assets (where complementarities
are stronger) are subject to more outflows than funds with liquid assets. Moreover, this pattern
disappears in funds that are held primarily by arge/institutional investors (who can internalize the
externalities). We provide evidence that are inconsistent with the alternative explanations based
on information conveyed by past performance or on clientele effects.
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