Capital Commitment and Investment Decisions: The Role of Mutual Fund Charges
42 Pages Posted: 6 Apr 2019 Last revised: 30 Apr 2021
Date Written: March 13, 2020
We study whether the choice of sales fee structure among mutual fund investors reveals valuable information about their investment horizon. We show that funds manage liquidity more efficiently and improve performance by timely matching their investment choices to the underlying investment horizon of their investors. Mutual funds with more committed capital hold shares longer, invest in more illiquid stocks, and take advantage of securities with slow-moving arbitrage opportunities. Our results suggest that financial intermediaries add value by offering investors the ability to select a fee structure that is most appropriate for their investment horizon. This evidence reveals an overlooked shadow cost of disintermediation in the mutual fund industry.
Keywords: mutual fund, intermediaries, investment horizon, liquidity management, fee structure
JEL Classification: G11, G23, J33, J44, L22, L25, L84, M12, M52
Suggested Citation: Suggested Citation