Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry

Consumer reactions to signals of quality in the market for investment management are evaluated. It is hypothesized that vigilance among mutual fund investors plays an important role in generating an efficient equilibrium in that market. It is shown that, as long as poor-quality funds exist, an inves...

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Bibliographic Details
Published in:The Journal of law & economics 1992-04, Vol.35 (1), p.45-70
Main Author: Ippolito, Richard A.
Format: Article
Language:English
Subjects:
Coefficients
Consumer behavior
Consumers
Economic growth rate
Economics
Fees
Financial investments
Growth funds
Industry (mutual funds)
Investment funds
Investment return rates
Investment strategies
Investments
Investors
Law
Mathematical models
Mutual funds
Product quality
Quality control
Service Quality
Statistical analysis
Studies
Citations: Items that cite this one
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Summary:Consumer reactions to signals of quality in the market for investment management are evaluated. It is hypothesized that vigilance among mutual fund investors plays an important role in generating an efficient equilibrium in that market. It is shown that, as long as poor-quality funds exist, an investment algorithm that allocates monies to the latest best performer is rational investor behavior. This investment algorithm conveys an externality to the market by denying poor-quality funds the opporutnity to capture an important market share. Data for the period 1965-1984 are used to determine whether investors follow these investment rules. The results indicate that: 1. investors react to new information about product quality in the mutual fund industry, 2. they react disproportionately where the expected payoffs are higher, and 3. returns within mutual funds are serially correlated.
ISSN:0022-2186
1537-5285
DOI:10.1086/467244