Biting the Bullet : Credible Monitoring by Mutual Fund Families

We investigate the role of mutual fund families as delegated monitors of their portfolio managers. Our findings provide evidence that credible monitoring by fund families, in the form of firing a fraction of their underperforming managers, generates positive signals for the investors, resulting in enhanced capital flows to the sibling funds in the family. Such intrafamily spillover effect is particularly strong for larger fund families, funds with more sophisticated investors, and funds located in states with more restricted labor mobility. The increased fund flows are unlikely to be driven by greater visibility of the family or resource or flow redistribution within the family. Our findings provide an economic rationale for the prevalence of mutual fund families, in accordance with the theoretical model of Gervais, Lynch, and Musto (2005)