Three essays on the strategies of mutual funds

Traditionally, mutual fund research has focused heavily on the characteristics of fund flows and performance---e.g., the convex flow-performance relationship and the lack of persistence of fund performance. However, compared to the extensive research on corporate managers, much less attention has been paid to the strategic behavior of fund managers. Recent events, especially the much publicized mutual fund scandals, suggest that the governance mechanism may not work as well as people have expected, and that fund managers' strategic choice may have important implication on investor welfare. My dissertation contributes to the literature by focusing on the strategies of mutual funds. It consists of three essays, each addressing a separate issue in either the open-end or closed-end fund industry.; In the first essay (co-authored with Vikram Nanda and Lu Zheng), Family Values and the Star Phenomenon: Strategies of Mutual Fund Families, we investigate the incentives of mutual fund families to take advantage of investors' star chasing behavior. We find that star performance results in greater cash inflow to the fund and to other funds in its family. Empirical evidence suggests that such positive spillovers induce lower ability families to pursue star creating strategy.; The second essay, Managing the Discount: The Distribution Policy of Closed-End Funds, focuses on the choice of distribution policy by closed-end fund managers in response to the discount-related takeover threat and inside pressure. I document that fund managers can effectively reduce the level of discount by committing to a high payout ratio. Under the assumptions that the discount is caused by some non-fundamental risk factors and that the impact of such risk factors is proportional to the amount of assets under management, I show that such a distribution policy can effectively reduce a fund's exposure to non-fundamental risk by committing to a lower long-run growth rate in total net assets. Empirical evidence is consistent with the above hypothesis.; The third essay (co-authored with Vikram Nanda and Lu Zheng), The ABCs of Mutual Funds: A Natural Experiment on Fund Flows and Performance, is motivated by the observation that many funds with front-end loads introduced additional share classes (with different fee and load structures) in the 1990s in response to the competition from no-load funds. The transition to a multiple-class structure provides a natural experiment with regard to investor clienteles and fund performance. Compared to single-class funds, multiple-class funds attract significantly more new money by catering to investors with different investment preferences. However, the downside to introducing the new classes is a significant drop in fund performance, possibly due to the increase in fund size and in the volatility of cash flows.