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Star Power: The Effect of Monrningstar Ratings on Mutual Fund Flow

Published online by Cambridge University Press:  06 April 2009

Diane Del Guercio  and
Paula A. Tkac
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Abstract

We apply an event-study methodology on over 10,000 Morningstar star rating changes and find that Morningstar has subsantial independent influence on the investment allocation decisions of retail mutual fund investors. It is the discrete change in the star rating itself and not the change in the underlying performance measures that drives frow. We document econnomically and statistically significant positive abnormal flow following rating upgrades, and negative abnormal flow following rating downgrades. In contrast to the cross-sectional flow performance literature, we find evidence of investor punishment of performance declines, some of which is evident immediately in the month of the rating change.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 43 , Issue 4 , December 2008 , pp. 907 - 936
Copyright
Copyright © School of Business Administration, University of Washington 2008

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