Agency Costs, Information and Portfolio Disclosure by Mutual Funds

In response to the alleged trading and marketing abuses in the mutual fund industry, the SEC recently adopted a new rule requiring more frequent portfolio disclosure in order to reduce agency costs and improve information for fund investors. This study investigates both the determinants and the potential effects of portfolio disclosure frequency by comparing funds providing quarterly voluntary disclosure to funds providing only mandatory semiannual disclosure using a sample of U.S. equity funds from 1985 to 1999. Our results indicate that disclosure frequency is primarily determined at the fund family level. We find that fund families with higher expense ratios, higher portfolio risk, higher likelihood of committing fraud and higher turnover, tend to disclose their holdings less frequently. These characteristics are likely proxies for a fund family's agency problems and/or informational advantage. To differentiate between the agency effect (i.e. the potential benefits of frequent disclosure to investors are higher for funds with agency problems) and the information effect (i.e. the potential costs of frequent disclosure are higher for funds with informational advantage), we examine the relation between disclosure frequency and future fund performance conditioned upon fund investment skills. We use past performance as a proxy for fund investment skills. We expect the agency effect to outweigh the information effect for unskilled funds and vice versa for skilled funds. Our findings show a significant asymmetric relation between disclosure frequency and future fund performance for past winners and losers. Within the bottom quintile of past performance, funds with semiannual disclosure significantly underperform funds with quarterly disclosure, indicating the dominance of the agency effect over the information effect. Within the top quintile of past performance, funds with semiannual disclosure significantly outperform funds with quarterly disclosure, indicating the dominance of the information effect over the agency effect We analyze the relation between disclosure frequency and fund new money to examine whether investors reward frequent disclosure. Controlling for other fund characteristics, we find higher new money growth for funds providing more frequent disclosure, especially among poor-performance funds.