Truth in Mutual Fund Advertising: Evidence on Future Performance and Fund Flows


  • Prem C. Jain,

  • Joanna Shuang Wu

  • Jain is from the A. B. Freeman School of Business, Tulane University, and Wu is from the William E. Simon Graduate School of Business Administration, University of Rochester. The authors thank Hemang Desai, Burton Malkiel, D. K. Malhotra, Pamela Erickson Shaw, K. Srinivasan, René Stulz, Venkat Subramaniam, Tracie Woidtke, participants at the workshops at Tulane University and the annual Financial Management Association meetings, two anonymous referees, and many of our colleagues for helpful comments at various stages of this research. We also thank Lipper Analytical Services, Inc. for providing data on monthly total net assets and returns, and Mark Carhart for data on factor returns to estimate four-factor models.


We examine a sample of 294 mutual funds that are advertised in Barron's or Money magazine. The preadvertisement performance of these funds is significantly higher than that of the benchmarks. We test whether the sponsors select funds to signal continued superior performance or they use the past superior performance to attract more money into the funds. Our analysis shows that there is no superior performance in the postadvertisement period. Thus, the results do not support the signaling hypothesis. On the other hand, we find that the advertised funds attract significantly more money in comparison with a group of control funds.