Star Power: The Effect of Morningstar Ratings on Mutual Fund Flow

FRB of Atlanta Working Paper No. 2001-15

50 Pages Posted: 5 Oct 2001

See all articles by Diane Del Guercio

Diane Del Guercio

University of Oregon, Lundquist College of Business; European Corporate Governance Institute (ECGI)

Paula A. Tkac

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Date Written: January 2007

Abstract

We apply an event-study methodology on over 10,000 Morningstar star rating changes and find that Morningstar has substantial independent influence on the investment allocation decisions of retail mutual fund investors. It is the discrete change in the star rating itself, and not the change in the underlying performance measures that drives flow. We document economically and statistically significant positive abnormal flow following rating upgrades, and negative abnormal flow following rating downgrades. In contrast to the cross-sectional flow-performance literature, we find evidence of investor punishment of performance declines, some of which is evident immediately in the month of the rating change.

Keywords: mutual funds, asset flow, event-study

JEL Classification: G11, G14, G20

Suggested Citation

Del Guercio, Diane and Tkac, Paula A., Star Power: The Effect of Morningstar Ratings on Mutual Fund Flow (January 2007). FRB of Atlanta Working Paper No. 2001-15, Available at SSRN: https://ssrn.com/abstract=286157 or http://dx.doi.org/10.2139/ssrn.286157

Diane Del Guercio

University of Oregon, Lundquist College of Business ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-5179 (Phone)
541-346-3341 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Paula A. Tkac (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street, NE
Atlanta, GA 30309-4470
United States
404-498-8813 (Phone)
404-498-8810 (Fax)

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