What We Talk about When We Talk about Mutual Fund’s Reputation

The term reputation appears in our everyday discussions about mutual funds. However, few studies have been done to explore how the mutual fund’s reputation forms and evolves. In this paper, we model fund’s reputation as the market’s belief whether the fund has the information to make profitable investment. We then propose an infinite-horizon model, in which the fund’s reputation can be invested by costly information acquisition but may depreciate due to exogenous economic shocks. Reputation has significant effects on the fund’s information acquisition decision, performance, and flows. Our results provide theoretical explanations to several empirical observations.