Payoff complementarities and financial fragility: Evidence from mutual fund outflows

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.