Do Mutual Funds Walk the Talk? Evidence from Fund Risk Disclosure

Abstract

We examine the informativeness of fund risk disclosure by combining fund returns and textual data. We develop a novel measure,INF, to capture the explanatory power of disclosed risks for fund returns. AverageINFis 55% after controlling for market risk and remains 26–29% after excluding risks related to fund name or strategy. We explain variations inINFthrough disclosure costs and benefits: (1) Funds with less informative disclosures face SEC comment letters and reduced flow, (2) informative disclosures attract institutional flows, and (3) performance concerns may disincentivize disclosure. Overall, funds face trade-offs between transparency and maintaining their competitive advantage. (JELG12)