Abstract

Mutual fund prospectuses contain a wealth of qualitative information about fund strategies, yet a systematic analysis of this content is missing from the literature. We use machine learning to group together funds with similar strategy descriptions, and ask whether they act in accordance with the text. Despite weak legal recourse for investors, we find that mutual funds largely do keep their promises. We document a market-based disciplinary mechanism: when funds diverge from their group's core strategy, investors withdraw capital. Funds respond to these punitive outflows by reducing their divergence from the peer group average at a faster rate.

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Citation

Abis, Simona, and Anton Lines. "Do Mutual Funds Keep Their Promises?." Columbia Business School, May 24, 2021.

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