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Quality and Product Differentiation: Theory and Evidence from the Mutual Fund Industry

Author

Listed:
  • Bonelli, Maxime

    (London Business School - Department of Finance)

  • Buyalskaya, Anastasia

    (HEC Paris)

  • Yao, Tianhao

    (Singapore Management University)

Abstract

We investigate the strategic behavior of financial products in differentiating beyond performance, using mutual funds as our laboratory. We provide evidence consistent with low-performing funds strategically using product differentiation, reflected in more unique fund prospectuses, to compete for customers by offering more niche products. Exploiting the issuance of Morningstar ratings as a shock to perceived quality, we establish a causal link between low quality and increased differentiation. Funds receiving a low rating actively change their prospectuses, increasing their product differentiation, which improves their survival likelihood. Much like other consumer products, mutual funds strategically pursue product differentiation to soften quality-based competition.

Suggested Citation

  • Bonelli, Maxime & Buyalskaya, Anastasia & Yao, Tianhao, 2021. "Quality and Product Differentiation: Theory and Evidence from the Mutual Fund Industry," HEC Research Papers Series 1428, HEC Paris.
    • Handle: RePEc:ebg:heccah:1428
    DOI: 10.2139/ssrn.3939239
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    More about this item

    Keywords

    Product Differentiation; Mutual Funds; Industrial Organization; Textual Analysis; Ratings;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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