Mutual Fund Redemption Risk: The Role of Mandatory Public Disclosures

This paper examines how mutual funds’ mandatory periodic public disclosures, a key device for their transparency, affect their redemption risk, i.e., the likelihood of capital outflows conditional on performance. Using a sample of U.S. equity and bond funds, I find that for a one standard deviation decline in performance, funds suffer about 17% higher outflows during the disclosure period. The increase in redemption risk is driven mainly by two disclosure-related factors. First, disclosures make fund investors more sensitive to performance by enabling them to assess fund fundamentals better. Second, disclosures induce fund investors to withdraw capital at a higher level of performance by reinforcing their beliefs that other investors will withdraw capital. In additional tests, I find that disclosures reduce redemption risk to some extent when information asymmetry among fund investors is high. Overall, my findings contribute to the ongoing debate on the role of transparency in the stability of the financial system.