Are Multiple Share Class Investors Disadvantaged? Evidence from Morningstar Stewardship Grades.

Abstract

This paper analyzes whether or not investors who utilize financial advisors/brokers are systematically directed to mutual fund investments that have lower quality governance. By utilizing the Morningstar Stewardship Grades and analyzing the Board Quality, Managerial Incentive, Fee Rating, and Corporate Culture Rating, we conclude that investors in multiple share class mutual funds (MS funds) are indeed investing in funds that have lower quality governance. Specifically, ordered probit regressions suggest that MS funds are less likely to have higher board quality ratings, less likely to have higher managerial incentive ratings, and are less likely to have higher fee ratings. The results suggest that regulating bodies like the US Securities and Exchange Commissions should investigate these investments to make sure retail investors are not being disadvantaged.

Keywords: Multiple Class Mutual Funds, Morningstar Stewardship Ratings, Governance, Multi-share Class

JEL Classification: G2, G20, G28