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J. P. Gomez – IE Business School in Madrid – Brown Bag Series
25 February 2019 @ 1:30 pm - 2:30 pm
Capital Commitment and Investment Decisions: The Role of Mutual Fund Charges
Mutual fund managers, we argue, extract valuable information from the investors’ choice among different load share-classes regarding their investment horizon. We find that the lack of explicit capital in share classes without entry or exit loads affects fund-trading horizon, stock selection, and in turn overall fund performance. Mutual fund managers hold shares for shorter periods of time, hold more cash, more liquid stocks, and stocks with less long-term investments as proxied by R&D and the number of patents. This unlocking of capital has negative externalities in turn for the underlying companies as these firms are more likely to cater to short-term demands by engaging in earnings management and lowering the accounting quality of the firm. On the other side, firms held by mutual funds with capital commitments are likelier to give long-term earnings guidance.