Blurred stars: Mutual fund ratings in the shadow of conflicts of interest
Y Zeng, Q Yuan, J Zhang
Journal of Banking and Finance | Elsevier | Published : 2015
Using unique data on trading commission payments to mutual fund rating companies (MFRCs) by mutual funds in China, this paper investigates whether the conflicts of interest arising from trading commission payments bias MFRCs’ mutual fund star ratings and hence affect their informativeness. We find the rating of a mutual fund is more optimistic when the MFRC either (i) receives trading commission fees from the mutual fund or (ii) can potentially receive fees in the future. The paper further shows that the usefulness of ratings in terms of predicting a fund’s future performance is negatively impacted by conflicts of interest. There is also evidence that investors can see through the problem, r..View full abstract
Awarded by National Natural Science Foundation of China
We are grateful for the helpful comments from Carol Alexander (Editor) and two anonymous reviewers. Yamin Zeng would like to thank financial support from the National Natural Science Foundation of China (Grant No. 71302014). Junsheng Zhang would like to thank financial support from the Humanities and Social Sciences Fund of the Ministry of Education of China, and the visitor program of the Centre for Asian Business and Economics at the University of Melbourne of Australia.