Costly Search and Mutual Fund Flows


  • Erik R. Sirri,

    1. Harvard Business School
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  • Peter Tufano

    1. Securities and Exchange Commission
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    • Tufano is at the Harvard Business School, Sirri is at the Securities and Exchange Commission. This paper is a substantial revision of an earlier working paper, “Buying and Selling Mutual Funds: Flows, Performance, Fees, and Services.” We would like to thank René Stultz (the editor), an anonymous referee, Jennifer Bethel, Michael Brennan, Dwight Crane, Al Fan-some, Ken Froot, William Goetzmann, Cliff Holderness, Steve Kaplan, Jay Light, Rob Neal, Tim Opler, Jay Patel, Rick Ruback, Nicolaj Siggelkow, Sheridan Titman, and seminar participants at the Berkeley Program in Finance, Boston College, Harvard Business School, Yale, the University of Chicago, the European Finance Association, the National Bureau for Economic Research, the Center for Research in Security Prices, the Securities and Exchange Commission, Vanderbilt University, and Suffolk University for helpful discussions and comments on the prior version of the paper. We would also like to thank Jonathan Shakes, Greg Smirin, Scott Blasdell, Philip Hamilton, and Alberto Moel for their research assistance. This project was supported by the Harvard Business School Division of Research, under the Global Financial System project (Tufano and Sirri), and by the Babson College Board of Research (Sirri). The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the authors and do not reflect the views of the Commission or of its staff.


This paper studies the flows of funds into and out of equity mutual funds. Consumers base their fund purchase decisions on prior performance information, but do so asymmetrically, investing disproportionately more in funds that performed very well the prior period. Search costs seem to be an important determinant of fund flows. High performance appears to be most salient for funds that exert higher marketing effort, as measured by higher fees. Flows are directly related to the size of the fund's complex as well as the current media attention received by the fund, which lower consumers' search costs.