Litigation and mutual-fund runs

Date
2017
Authors
Qian, M.
Tanyeri, B.
Advisor
Instructor
Source Title
Journal of Financial Stability
Print ISSN
1572-3089
Electronic ISSN
1878-0962
Publisher
Elsevier Inc.
Volume
31
Issue
Pages
119 - 135
Language
English
Type
Article
Journal Title
Journal ISSN
Volume Title
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.

Course
Other identifiers
Book Title
Keywords
Mutual-fund flows, Litigation, Returns, G23, G14
Citation
Published Version (Please cite this version)