How Do Mutual Fund Management Fee Changes Impact Mutual Fund Flows

This paper investigates the causal relationship between changes in mutual fund management fees and fund flows using a comprehensive dataset of daily fund flows. Our analysis provides evidence of investor responsiveness to fee adjustments: an increase in fees leads to a decrease in net inflows, and a decrease in fees leads to an increase in net inflows. We address endogeneity concerns through various methods, including distinguishing between anticipated and surprising fee changes, using instrumental variables, and leveraging two regulatory reforms that affected management fees based on fund type or fee structure. By distinguishing inflows from outflows, we find that new investments are more sensitive to fee changes than existing investments. Using a proprietary database of all mutual fund holdings, we find that new investments by current fund investors drive this sensitivity. While on average our findings challenge the prevailing notion that retail investors are passive and inattentive to investment costs, we do find that investors in high management fee funds are much less sensitive to further fee increases.