Is ‘Voting with Your Feet’ an Effective Mutual Fund Governance Mechanism?

46 Pages Posted: 5 Dec 2010

See all articles by Meijun Qian

Meijun Qian

Zhejiang University International Business School

Date Written: July 30, 2010

Abstract

Investors in open-end mutual funds can vote with their feet by withdrawing assets from or adding assets to these funds. This paper assesses the effectiveness of this market discipline mechanism by investigating whether voting with feet prevents the abusive practices that led to the 2003-2004 trading scandals. The research results indicate that funds with higher flow sensitivity – that is, a higher density of vigilant clients – have lower arbitrage potential and fewer abnormal flows, which in turn implies less opportunistic trading. As a result, these funds have a lower probability of being implicated in the scandals. These findings suggest that investors’ ability to withdraw assets from or add assets to the funds is an effective mutual fund governance mechanism. In funds with less sophisticated investors who cannot use this option, other means of governance are especially important.

Keywords: investor vigilance, flow sensitivity, trading practice, market discipline

JEL Classification: G23, G28

Suggested Citation

Qian, Meijun, Is ‘Voting with Your Feet’ an Effective Mutual Fund Governance Mechanism? (July 30, 2010). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1693005

Meijun Qian (Contact Author)

Zhejiang University International Business School ( email )

718 Haizhou East Road, Xiashi
ZIBS building
Haining
China

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