Better Kept in the Dark? Portfolio Disclosure and Agency Problems in Mutual Funds

We predict that mandating portfolio disclosure can hurt mutual fund investors via the agency channel.  Portfolio disclosure imposes skill re-assessment risks on fund managers which in turn translate into agency costs to investors, especially for funds characterized with high levels of ex-ante managerial skill uncertainty. Using a regulatory change that mandated a more frequent portfolio disclosure as a quasi-natural experiment, we show that funds with high levels of ex-ante managerial skill uncertainty responded to the regulatory change with an increase in management fees and a decrease in risk taking behavior, relative to funds with low levels of ex-ante managerial skill uncertainty. These actions get ultimately transmitted to fund investors in the form of inferior net performance.  Our findings shed new light on the disclosure, agency, and governance issues of mutual funds.

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