Managerial Replacements in Mutual Fund Families

Abstract

This paper examines managerial replacements made by mutual fund families. Using a unique hand-collected dataset of 5,242 managerial replacement events from 1990 to 2011, this study finds fund’s performance and flow ranking at the fund family level form the basis of mutual fund families' disciplinary decisions. Specifically, mutual fund families are more likely to replace fund managers ranked at the bottom of fund families in terms of performance and flows. While this study does not observe any spillover effect of replacing bottom performing managers, the replacement of top performing managers generates negative spillover (both performance and flows) effects on other funds in the family. In further tests, this study finds managerial replacements to be more prevalent in larger fund families and families with high turnover ratios. Finally, the replacement of bottom performing managers explain future families’ performance and money flows, suggesting that there is economic value attached to the monitoring activities of mutual fund families.