First-mover advantage in funds revisited

We investigate the first-mover advantage that motivates occasional run-like redemptions from mutual funds with liquidity mismatches. The role of such behavior in amplifying financial crises and the necessity for its regulation remain subjects of ongoing debate. This paper examines the presence and impact of first-mover advantage flows using detailed data from a substantial cohort of EU-regulated funds. We confirm that corporate bond funds, unlike equity funds, exhibit a concave flow-to-performance relationship, with the outflow response to poor performance being more pronounced than the inflow response to good performance. During the exogenous shock in March 2020, corporate bond funds with prone-to-run characteristics, despite not holding more illiquid assets, experienced significantly larger increases in net outflows. These patterns align with greater strategic complementarities in corporate bond funds and indicate a fragility concern. Furthermore, after controlling for asset liquidity and several other asset characteristics, as well as time-varying fundamental information, bonds and equities with larger ownership exposure to prone-to-run funds suffered greater price impacts. The findings collectively support the existence of strategic complementarities arising from mutual fund structures and demonstrate how the resulting redemption behaviour can amplify crisis dynamics.