Open-end mutual funds that close to new investors: a signaling theory

Date

1999-08

Journal Title

Journal ISSN

Volume Title

Publisher

Texas Tech University

Abstract

This dissertation develops and tests a theory for why open-end mutual funds close to new investors. No published paper has offered a theory for why mutual funds managers close their funds to new investors. The theory states that mutual funds with excess cash on hand due to previous abnormal performance and lack of current investment opportunities close to new investors to send a signal to the current shareholders. The signal is that the fund has currently grown "too large" for the fund manager to manage effectively and efficiently and that future expected good investment opportunities exist for the mutual fund. Eighty-nine fund closings from 1980 to 1988 were examined. The empirical evidence does not support the theory. These mutual funds generated negative abnormal performance before and after closing when compared to a Wilshire benchmark. Thus, the reason why open-end mutual funds close to new investors remains a puzzle.

Description

Keywords

Mutual funds, Investments

Citation