"Payoff Complementarities and Financial Fragility: Evidence from Mutual Fund Outflows"
Working Paper,
February
2009
Publication type: Working paper
Research Archive Topic: Business Economics and Public Policy, Capital Markets and Investments, Corporate Finance
Abstract
The paper provides empirical evidence that strategic complementarities among investors generate fragility in financial markets. Analyzing mutual-fund data, we find that, consistent with a theoretical model, funds with illiquid assets (where complementarities are stronger) exhibit stronger sensitivity of outflows to bad past performance than funds with liquid assets. We also find that this pattern disappears in funds where the shareholder base is composed mostly of large investors. We present further evidence that these results are not attributable to alternative explanations based on the informativeness of past performance or on clientele effects. We analyze the implications for funds' performance and policies.
The PDF above is a preprint version of an article published in the Journal of Financial Economics. The final version may be found at < http://dx.doi.org/10.1016/j.jfineco.2010.03.016 >.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.