Managerial Turnover and the Behavior of Mutual Fund Investors

Using a sample of domestic U.S. equity mutual funds, we find strong evidence that investors respond to managerial replacements. We find that the top performing funds that have a change in management subsequently have lower flows compared to funds of which the manager is retained. On top of that, we find that funds replacing their bad performing manager subsequently have lower flows compared to bad performing funds with a continuing manager. This latter finding is inconsistent with a world of rational expectations. The finding is, however, in line with a signaling hypothesis, even though we find evidence that the signals mutual fund investors perceive from managerial turnover is not justified as fund performance increases following the replacement of bad performing managers. Interestingly, the results are very similar for institutional funds and retail funds. Our finding cannot be explained by differences in fund characteristics such as the age of a fund, size, or expenses, or by differences in portfolio risks.