Journal of Financial Economics 65 (2002) 131–158
The dilution impact of daily fund ﬂows on
open-end mutual funds
Jason T. Greene
*, Charles W. Hodges
College of Business, Georgia State University, Atlanta, GA 30303,USA
State University of West Georgia, Carrollton, GA 30118,USA
Received 26 April 2000; accepted 8 May 2001
We examine how mutual fund ﬂows that are correlated with subsequent fund returns can have
a dilution impact on the performance of open-end funds. Active trading of open-end funds has a
meaningful economic impact on the returns of passive, nontrading shareholders, particularly in
U.S.-based international funds. The overall sample of domestic equity funds shows no dilution
impact, but we ﬁnd an annualized negative impact of 0.48% in international funds (and nearly
1% for a subsample of funds whose daily ﬂows are particularly large). The exchange and pricing
policies of mutual funds can thus have important performance-related implications.
r 2002 Elsevier Science B.V. All rights reserved.
JEL classiﬁcation: G0; G1; G2
Keywords: Mutual funds; Flows; Daily fund ﬂows
Many open-end mutual funds provide virtually free and unlimited liquidity to
those who wish to buy or redeem fund shares. The fund itself must either engage in
We appreciate the valuable comments we have received from an anonymous referee, James Ang,
Robert Battalio, Conrad Ciccotello, Robert Jennings, Abhay Shah, Scott Smart, Steve Smith, Paula Tkac,
and seminar participants at the 2000 Financial Management Association meetings, Florida State
University, and the Atlanta Finance Workshop (Federal Reserve Bank of Atlanta, Emory University,
Georgia Institute of Technology, and Georgia State University). We thank David Rakowski for excellent
research assistance and TrimTabs, Inc. of Santa Rosa California for providing data. All errors are the sole
responsibility of the authors.
E-mail address: firstname.lastname@example.org (J.T. Greene).
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