The Economic Consequences of Mutual Fund Advisory Misconduct∗

I evaluate the economic consequences of advisory misconduct by estimating the effect of publicly disclosed regulatory actions of mutual fund advisors on fund flows. Based on misconduct events from 2000-2013, I find a 5% reduction in fund flows to malfeasant advisors in one year following the misconduct. Further analysis using the 2001 SEC electronic filing mandate as a positive shock to misconduct transparency corroborates these results. In order to mitigate the negative impact on flows, mutual fund companies tend to reduce contractual incentives, raise marketing expenditures and relax investment restrictions in subsequent years. Moreover, advisory misconduct adversely affects advising relationships and advisor survival. My findings highlight the significant impact of misconduct on fund flows and advisory contracting in the mutual fund industry. JEL Classification: G02; G23; G28