Mutual Fund Risk And Market Share Adjusted Fund Flows

Multiple studies have examined the relationship between performance and subsequent fund flows. Prior work takes a fund's dollar flows divided by its assets under management as the dependent variable. However, individual fund flows have to add up to the aggregate flow in every period. If aggregate flows are high, then on average individual flows will be so, and vice-versa. To accommodate this accounting identity, this paper uses market share as the dependent variable. Unlike percentage flows, market shares always add to the aggregate value: one. With market shares as the focus, the conclusion drawn here is that adding volatility to a fund's return process does not increase a firm's funds under management. Thus, contrary to some prior conclusions, this paper does not find support for the idea that fund flows provide managers with an incentive to engage in additional risk taking.