Consumer reaction on tumbling funds : evidence from retail fund outflows during the financial crisis 2007/2008

Within this study we propose different measures to prove the influence of prior retail fund performance on fund flows. In contrast to previous literature, our work indicates that investors behave directly and in a selective manner by redeeming their shares of poor performing funds. By using a large data set of 1672 retail funds in Germany from March 2008 to April 2010 we are able to underscore that in general, both the prior performance of funds and the prior net redemptions have a statistically significant influence on outflows of funds. Moreover, it seems likely that investors react faster to market signals by withdrawing their shares in crisis situations than in previous decades that might be due to lower cost of information. Our findings can serve as a warning signal for policy-makers, regulatory authorities and the fund industry to establish a strong regulatory framework to prevent liquidity shortages of retail funds. -- Liquidity risk ; financial fragility ; bank run ; mutual funds ; fund flows ; net redemptions of fund shares ; fund performance ; fund industry ; risk sharing