Molly Mercer

Worthless Warnings? Testing the Effectiveness of Disclaimers in Mutual Fund Advertisements

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Undue Influence? The Effect of Social Media Advice on Investment Decisions

11 trillion is invested in mutual funds in the United States. Mutual fund investors flock to funds with high past returns, despite there being little, if any, relationship between high past returns and high future returns. Because fund management fees are based on the amount of assets invested in their funds, however, fund companies regularly advertise the returns of their high-performing funds. The SEC requires these advertisements to contain a disclaimer warning that past returns don’t guarantee future returns and that investors could lose money in the funds. This article presents the results of an experiment that finds that this SEC-mandated disclaimer is completely ineffective. The disclaimer neither reduces investors’ propensity to invest in advertised funds nor diminishes their expectations regarding the funds’ future returns. The experiment also suggests, however, that a stronger disclaimer – one that informs investors that high fund returns generally don’t persist – would be much more effective.

The Fleeting Effects of Disclosure Forthcomingness on Management's Reporting Credibility

Individual investors increasingly rely on investment advice from social media platforms. Even advice with little, if any, predictive value appears to influence investor decisions. Our study reports the results of two experiments that help explain why investors rely on such advice. We find that some investors rely on advice with low predictive value because they believe that the advice is informative. However, other investors who rely on the advice are unaware of its influence on their investment decisions. Specifically, we find that sentiment-only social media advice influences investment decisions even among investors who believe that the advice should not and does not affect their decisions. Further, we find that investors rely equally on advice that conveys only sentiment and advice that conveys information about firm fundamentals, despite these same investors indicating that they should and did rely more on fundamentals-related advice. Our research suggests that regulators’ approach of asking investors to evaluate the credibility of the source is inadequate. To avoid being influenced by low quality information, investors need to avoid it entirely.