School of Business

Impact of competition on fund disclosures and consumer search costs

Document Type

Article

Abstract

Purpose: The purpose of this paper is to investigate the impact of competition in financial markets on the frequency of portfolio disclosures by mutual funds and its implications for consumer search costs. Design/methodology/approach: The empirical analysis merges the Center for Research in Security Prices (CRSP) survivorship bias-free mutual fund database, the Thompson Financial CDA/ Spectrum holdings database and the CRSP stock price data. The sample covers the time period between 1993 and 2010 and OLS and logistic regressions are used to investigate the impact of competition on fund disclosures. Findings: This paper finds that mutual fund disclosures decrease with market competition and this effect is amplified for funds holding illiquid assets. These results provide empirical support for the findings of Carlin et al. (2102). Mutual funds use portfolio disclosures as a marketing tool to attract investments in a tournament-like market, where superior relative performance and greater visibility are rewarded with convex payoffs. With competition, the likelihood of receiving new investments decreases for each fund and funds respond by reducing costly voluntary disclosures. The disclosure costs are higher for funds holding illiquid assets, and hence, the effect is stronger for them. Originality/value: This paper has important policy implications for disclosures in a market where relative performance matters. The traditional view is that competition induces voluntary disclosure because entities would like to differentiate themselves from competitors, and hence, competition should increase market transparency. However, this paper sheds light on the negative consequence of competition in a tournament-like mutual fund market.

Publication Title

Review of Accounting and Finance

Publication Date

2019

Volume

18

Issue

2

First Page

198

Last Page

220

ISSN

1475-7702

DOI

10.1108/RAF-01-2017-0016

Keywords

consumer search cost, market competition, market transparency, mutual fund disclosure

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