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The Performance of Investment Bank-Affiliated Mutual Funds: Conflicts of Interest or Informational Advantage?

Published online by Cambridge University Press:  13 February 2012

(Grace) Qing Hao
Affiliation:
haoq@missouri.edu
Xuemin (Sterling) Yan
Affiliation:
Trulaske College of Business, University of Missouri, 403 Cornell Hall, Columbia, MO 65211. yanx@missouri.edu

Abstract

Using a comprehensive sample of U.S. mutual funds from 1992 to 2004, we find strong evidence that investment bank-affiliated funds underperform unaffiliated funds. Consistent with the conflict of interest hypothesis, we find that affiliated funds hold disproportionately large amounts of stocks of their initial public offering and seasoned equity offering clients. Moreover, worse-performing clients are more likely to be held by affiliated funds. Our results are robust to alternative risk adjustments, portfolio weighting schemes, and regression methodologies. Overall, our findings are consistent with the idea that investment banks use affiliated funds to support underwriting business at the expense of fund shareholders.

Type
Research Articles
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

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