The Impact of Scandals on Mutual Fund Performance, Money Flows and Fees

We examine the effects of fraud committed by mutual fund managers taking into account the dual responsibilities managers have for their employer firm and investors. Performance increases in the immediate aftermath of a scandal being reported, followed by a significant drop suggesting fund managers actively preempt the fallout from fraud disclosures. Investors who remain with a scandal fund under-perform by an average of 48 basis points in the subsequent year. Fraud is punished by reduced fund inflows to affected funds. Underperformance and money outflows are more severe with higher monetary fines, regulatory actions initiated by SEC, and the involvement of more than one regulatory body. Scandal funds reduce their expense ratios, possibly to retain and attract investors. This effort allows scandal funds to delay asset fire sales by up to a quarter. However, fund families reduce expenditure on marketing and distribution costs, likely to ameliorate the fallout from scandals by withdrawing affected funds from the limelight