Litigation and mutual-fund runs
Author
Qian, M.
Tanyeri, B.
Date
2017Source Title
Journal of Financial Stability
Print ISSN
1572-3089
Electronic ISSN
1878-0962
Publisher
Elsevier Inc.
Volume
31
Pages
119 - 135
Language
English
Type
ArticleItem Usage Stats
130
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78
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Abstract
We investigate whether anticipation of adverse events (litigation about market timing and late trading) may trigger mutual-fund runs. We find that runs start as early as three months prior to litigation announcements. Pre-litigation runs accumulate to 31 basis points of the total net assets over a three-month window; post-litigation runs may last more than six months and accumulate to 1.25 percent over the first three-month window. Additionally, investors who run before litigation announcements earn significantly higher risk-adjusted and peer-adjusted returns than those who run after litigation. The difference in returns is particularly pronounced for funds holding illiquid assets. Finally, securities held by litigated fund families significantly underperform vis-á-vis other securities in terms of lower abnormal returns and liquidity. Our analysis suggests that a pro-rata ownership design is insufficient to prevent mutual-fund runs.