Abstract

In September 2003, several prominent mutual fund companies came under investigation for illegal trading practices. Allegations suggested these funds allowed certain investors to profit from short-term trading schemes at the expense of other investors. Surprisingly, regulatory authorities have known for more than two decades of the potential for such abuses, yet have taken limited steps to correct the problem. We explore investor reaction to the scandal by measuring assets under management, stock returns, and performance. Mutual funds managed by investigated firms show a substantial decline in post-announcement assets under management. These firms also experienced significantly negative announcement-period returns. Finally, we discuss several policy suggestions to prevent future trading abuses and provide direction for future research.