We exploit a novel natural experiment to establish a causal relation between media attention and consumer investment behavior, independent of the conveyed information. Our findings indicate a 31% local average increase in quarterly capital flows into mutual funds mentioned in a prominent Wall Street Journal “Category Kings” ranking list, compared to those funds which just missed making the list. This flow increase is about seven times larger than extra flows due to the well-documented performance-flow relation. Other funds in the same fund complex receive substantial extra flows as well, especially in smaller complexes. There is no increase in flows when the Wall Street Journal publishes similar lists absent the prominence of the Category Kings labeling. We show mutual fund managers react to the incentive created by the media effect in a strategic way predicted by theory, and present evidence for the existence of propagation mechanisms including increased fund complex advertising subsequent to having a Category King and increased efficacy of subsequent fund media mentions.

Abstract Before regulations were enacted to prevent such practices, information leaked through selective disclosure was incorporated into markets prior to the public release of news. “News days” did not deliver news to markets; now they do. We provide novel evidence of changes in returns and turnover behavior around the enactment of regulations barring selective disclosure practices in the United States and the EU. We conversely document lack of such changes in Australia and Japan, which did not implement similar measures. We conclude that selective disclosure resolves Roll’s R2 puzzle.