Worthless Warnings? Testing the Effectiveness of Disclaimers in Mutual Fund Advertisements


  • The authors thank an anonymous referee, Clark Freshman, Brett Green, Michael Green, Jay Koehler, Anne Magro, William Wang, Ronald Wright, and participants at faculty workshops at the Conference on Empirical Legal Studies, George Mason University, UC Hastings College of the Law, Wake Forest Law School, and William and Mary Law School for helpful comments and suggestions. The authors are also grateful to Jason Baker and Elise Pallais for excellent research assistance.

Molly Mercer, DePaul University, 1 E. Jackson Bivd., DePaul Center Rm. 6027, Chicago, IL 60604; email: mmercer2@depaul.edu. Mercer is Associate Professor of Accounting; Palmiter and Taha are Professors of Law, Wake Forest University School of Law.


More than $11 trillion is invested in mutual funds in the United States. Mutual fund investors flock to funds with high past returns, despite there being little, if any, relationship between high past returns and high future returns. Because fund management fees are based on the amount of assets invested in their funds, however, fund companies regularly advertise the returns of their high-performing funds. The SEC requires these advertisements to contain a disclaimer warning that past returns do not guarantee future returns and that investors could lose money in the funds. This article presents the results of an experiment that finds that this SEC-mandated disclaimer is completely ineffective. The disclaimer neither reduces investors' propensity to invest in advertised funds nor diminishes their expectations regarding the funds' future returns. The experiment also suggests, however, that a stronger disclaimer—one that informs investors that high fund returns generally do not persist—would be much more effective.