Star Ratings and the Incentives of Mutual Funds

• 成果类型: Article
• 署名作者: Huang, Chong; Li, Fei; Weng, Xi
• 署名单位: University of California System; University of California Irvine; University of North Carolina; University of North Carolina Chapel Hill; Peking University
• 刊物名称: JOURNAL OF FINANCE
• ISSN/ISSBN: 0022-1082
• DOI: 10.1111/jofi.12888
• 发表日期: 2020
• 页码: 1715-1765
• 关键词: Reputation; Managers; certification

摘要

We propose a theory of reputation to explain how investors rationally respond to mutual fund star ratings. A fund's performance is determined by its information advantage, which can be acquired but decays stochastically. Investors form beliefs about whether the fund is informed based on its past performance. We refer to such beliefs as fund reputation, which determines fund flows. As performance changes continuously, equilibrium fund reputation may take discrete values only and thus can be labeled with stars. Star upgrades thus imply reputation jumps, leading to discrete increases in flows and expected performance, although stars do not provide new information.