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Why Do Mutual Fund Advisory Contracts Change? Performance, Growth, and Spillover Effects




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    • Jerold B. Warner and Joanna Shuang Wu are from the Simon Graduate School of Business Administration, University of Rochester. The authors gratefully acknowledge helpful comments from Dan Deli (AFA discussant), Campbell Harvey (the Editor), Thomas Lys, Peter Tufano, Jerry Zimmerman, workshop participants at the University of Rochester and Northwestern University, and the referees. A number of investment industry professionals have also provided valuable feedback. These include Joseph Willett (Marsico Funds), Rochelle Antoniewicz (Investment Company Institute), and Brett Goddard (Lipper). We also thank Kalina Berova, Jeff Han, and Shunlan Fang for excellent research assistance.


We examine changes in equity mutual funds' investment advisory contracts. We find substantial advisory compensation rate changes in both directions, with typical percentage fee shifts exceeding one-fourth. Rate increases are associated with superior past market-adjusted performance, whereas rate decreases reflect economies of scale associated with growth, and are not associated with extreme poor performance. There are within-family spillover effects. Superior (e.g., star) performance for individual funds is associated with rate increases for a family's other funds. Rate reductions post-2004 by family funds involved in market timing scandals do not have large industry spillover effects.