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Redemption Fees: Reward for Punishment

Working Paper
   with Michael S. Finke and David Nanigian

Awards:
- 2008 Best Paper Award, Academy of Financial Services
   Annual Meeting
Proceedings:
- 2009 Financial Management Association Annual Meeting
- 2008 Academy of Financial Services Annual Meeting
Press Coverage:
-"Funds Drop Redemption Fees as Market-Timing Fears Wane"
   by Maura McDermott, BoardIQ (5 July 2011)
-"The Fee That Makes You Money"
   by Jeff Brown, Banking My Way

View: Abstract | SSRN Page

Short-term redemption fees may prevent investors from frequently trading in and out of mutual funds, which results in an implicit wealth transfer from long- to short-term fund investors. This paper studies determinants and implications of short-term redemption fees. We find that the probability of redemption fee initiation is increasing in operating expenses and recent returns and decreasing in the liquidity of portfolio stockholding. In the cross-section of mutual funds, those with redemption fees outperform their counterparts by 1.0 to 1.4 percent a year. Moreover, we observe this increase within a given fund such that the estimate is simply a proxy for managerial quality. Instead, portfolio characteristics change with the introduction of a redemption fee. Most notably cash holdings decrease by 77 to 102 basis points after fee initiation.

Download: Paper | BibTeX

Last Updated: 10 August 2012