DP11990 | Inefficient Globalization of Finance: Evidence from Marketing-Oriented Overseas Expansions of Low-Skilled Mutual Fund Families

Publication Date

04/24/2017

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Abstract

We study how the globalization of finance may unintendedly reduce market efficiency through low-skilled financial institutions. Particularly, it may allow these companies to achieve product differentiation by launching new products for “marketing” purposes rather than for the goal of improving investor welfare or market efficiency. Using a complete sample of global mutual funds, we find that low-skill fund companies are more likely to launch new funds that track less-explored foreign equity market indices. However, these new funds typically deliver lower returns and lower diversification benefits. The associated cross-border capital flows reduce price efficiency and liquidity.