Investors’ Distraction and Strategic Re-Pricing Decisions
Posted: 8 May 2010
Date Written: February 1, 2010
In this paper, I analyze re-pricing decisions for mutual fund management services. I derive measures of performance and price sensitivity and show that investors do not consider expense ratios simply as a negative component of expected returns: while performance sensitivity monotonically increases with past performance, price-sensitivity does not. Investors that buy top past-performers seems to be "distracted" by the fund previous return and pay relative little attention to expense ratios. Moreover price-sensitivity increases with fund visibility while performance sensitivity decreases, and while looking at data from 1980 to 2006 no discernible trend can be observed in the average performance sensitivity, price sensitivity strongly increases after 1990 due to the dramatic increase in the availability of mutual funds information for retail investors. Finally I show that investment companies strategically time their re-pricing decisions in order to exploit time variations in price and performance sensitivities.
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Keywords: Mutual funds, expense ratios, price sensitivity
JEL Classification: G11, G23
Suggested Citation: Suggested Citation