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Competition in Financial Services: Evidence from British Mutual Funds


  • A. Joseph Warburton

  • This article is based on a chapter of my Ph.D. dissertation at the University of Michigan Ross School of Business. I thank Amiyatosh Purnanandam for invaluable advice and guidance. I also thank Deniz Anginer, Robert Bliss, Quinn Curtis, David Hess, Vikramaditya Khanna, Han Kim, Clemens Sialm, Michael Simkovic, Andrew Verstein, Bohui Zhang, two anonymous referees, and participants at the Conference on Empirical Legal Studies and the International Banking, Economics and Finance Association annual meeting. All errors are mine.

Associate Professor of Law & Finance, College of Law and Whitman School of Management, Syracuse University, White Hall, Syracuse, NY 13244; email:


This article explores the effects of competition on risk-taking behavior and firm performance within the financial services industry. It does so by exploiting a regulatory change that allowed new players to enter the British mutual fund industry. Exploiting this regulatory shock, we trace nontrivial linkages among industry competition, risk taking, and performance. Greater competition followed the regulatory liberalization, leading to a significant increase in risk-taking behavior of funds. Competition generated performance efficiencies, forcing underperforming funds to exit and halting earlier value destruction. Competition, however, did not produce tangible cost savings for consumers of investment services.