Previous work shows large differences in fees for S&P 500 index funds and other funds and suggests that investors suffer wealth losses investing in high-fee funds when similar low-fee funds are available. In contrast, the neoclassical model of mutual funds (Berk and van Binsbergen, 2015, J. Financ. Econ., 118, 1–20) argues that percentage fees are irrelevant, as fund size will adjust in equilibrium such that net alphas are equal to zero. We show that fees matter from an investor perspective. We document (i) a strong negative association between net-of-fee fund performance and fees in a sample of all US and international equity funds, (ii) economically large, robust, persistent, and pervasive fee dispersion in the mutual fund industry, and (iii) important economic effects for investors. During the sample period, the mutual fund industry has generated a total value lost (i.e., a negative net value added) of 125 billion USD, coming predominantly from high-fee funds.

We introduce and test a firm-level innovation-efficiency measure new to the finance literature. The measure, termed the research quotient (RQ), defined as the firm-specific output elasticity of research and development (R&D), was first developed in the management literature. RQ has a low correlation with existing innovation input, output, and efficiency measures. We test RQ in a number of innovation tests common to the finance literature and find that RQ is robust in all tests of firm value, even after controlling for previous innovation measures. The results suggest that RQ may serve as a relevant complementary measure of a company’s innovation.

The fragility of the CAPM has led to a resurgence of research that frequently uses trading strategies based on sorting procedures to uncover relations between firm characteristics (such as “value” or “glamour”) and equity returns. We examine the propensity of these strategies to generate statistically and economically significant profits due to our familiarity with the data. Under plausible assumptions, data snooping can account for up to 50 percent of the in‐sample relations between firm characteristics and returns uncovered using single (one‐way) sorts. The biases can be much larger if we simultaneously condition returns on two (or more) characteristics.

ABSTRACT We test overreaction theories of short‐run momentum and long‐run reversal in the cross section of stock returns. Momentum profits depend on the state of the market, as predicted. From 1929 to 1995, the mean monthly momentum profit following positive market returns is 0.93%, whereas the mean profit following negative market returns is −0.37%. The up‐market momentum reverses in the long‐run. Our results are robust to the conditioning information in macroeconomic factors. Moreover, we find that macroeconomic factors are unable to explain momentum profits after simple methodological adjustments to take account of microstructure concerns.

ABSTRACT We examine whether mutual funds change their names to take advantage of current hot investment styles, and what effects these name changes have on inflows to the funds, and to the funds' subsequent returns. We find that the year after a fund changes its name to reflect a current hot style, the fund experiences an average cumulative abnormal flow of 28%, with no improvement in performance. The increase in flows is similar across funds whose holdings match the style implied by their new name and those whose holdings do not, suggesting that investors are irrationally influenced by cosmetic effects.