Dynamic Contracting in the Mutual Fund Industry

This paper analyzes the dynamics of contractual agreements between mutual funds and investment advisors. Using a new dataset that covers U.S. funds between 1993-2002, I find cross-sectional and time-series determinants of advisory contracts. I show that funds rarely experience contractual renegotiation and advisor changes. However, these changes are beneficial: decreases in advisory rates significantly increase subsequent fund performance and net inflows. Separating from an advisor has a significant positive effect on the subsequent ranking of mid-performing funds. These results are puzzling: contractual changes are rare, in spite of their economically significant benefits.