Using fund flow data from 1994 to 2004, we examine the market response to mutual fund scandals. We identify scandals as reported in the Wall Street Journal. We report that during the 12 month period beginning with the first report of the scandal in the Wall Street Journal, scandal funds experience a significantly greater outflow of assets. The outflow is greater for funds that experienced a more severe scandal (as proxied through the size of the regulatory settlement or fine amount, the number of WSJ articles on the scandal, and the filing of formal charges). Outflows are greater where the scandal involved a penalized entity compared where no entity was penalized, indicating that the market punishes funds less where the wrongdoer is no longer associated with the fund (as is the case with individual wrongdoers). Outflows are also greater where the scandal involved harm to fund investors compared with scandals that did not harm the fund investors (but rather harmed third parties). Who initially discovered the scandal is an important determinant of the amount of outflows. Scandals first discovered by the SEC (as opposed to a non-governmental source or another governmental body) experience no significant outflows. Lastly, we report that the presence of strengthened corporate governance controls have no impact on the amount of outflows from a fund.
Date of Authorship for this Version
Choi, Stephen and Kahan, Marcel, "The Market Penalty for Mutual Fund Scandals" (2006). New York University Law and Economics Working Papers. 43.