The Harvard Law School Forum on Corporate Governance https://corpgov.law.harvard.edu The leading online blog in the fields of corporate governance and financial regulation. Fri, 15 May 2026 11:32:13 +0000 en-US hourly 1 https://wordpress.org/?v=6.5.8 https://corpgov.law.harvard.edu/wp-content/uploads/2024/02/cropped-photography-4-e1706898544564-1-32x32.png Don’t Take Their Word For It: The Misclassification of Bond Mutual Funds – The Harvard Law School Forum on Corporate Governance https://corpgov.law.harvard.edu 32 32 Don’t Take Their Word For It: The Misclassification of Bond Mutual Funds https://corpgov.law.harvard.edu/2021/07/14/dont-take-their-word-for-it-the-misclassification-of-bond-mutual-funds/?utm_source=rss&utm_medium=rss&utm_campaign=dont-take-their-word-for-it-the-misclassification-of-bond-mutual-funds https://corpgov.law.harvard.edu/2021/07/14/dont-take-their-word-for-it-the-misclassification-of-bond-mutual-funds/#comments Wed, 14 Jul 2021 13:11:02 +0000 https://corpgov.law.harvard.edu/?p=139037?d=20210714091102EDT Posted by Huazhi Chen (University of Notre Dame), Lauren Cohen (Harvard Business School), and Umit Gurun (University of Texas at Dallas), on Wednesday, July 14, 2021
Editor's Note:

Huazhi Chen is Assistant Professor of Finance at the University of Notre Dame’s Mendoza School of Business; Lauren Cohen is the L.E. Simmons Professor in the Finance & Entrepreneurial Management Units at Harvard Business School; and Umit G. Gurun is the Ashbel Smith Professor at the University of Texas at Dallas. This post is based on their recent paper.

Information acquisition is costly for investors—the exact cost of which depending on timing, location, a person’s private information set, etc. To this end, delegated portfolio management is the predominant way in which investors are being exposed to both equity and fixed income assets. With over 16 trillion dollars invested, the US mutual fund market, for instance, is made up of over 5,000 delegated funds and growing. While the SEC has mandated disclosure of many aspects of mutual fund pricing and attributes, different asset classes are better (and worse) served by this current disclosure level. Investors have thus turned to private information intermediaries to help fill these gaps.

In our paper, we show that for one of the largest markets in the world, US fixed income debt securities, this has led to large information gaps that have been filled by strategic-response information provision by funds. The reliance on (and by) the information intermediary has resulted in systematic misreporting by funds. This misreporting has been persistent, widespread, and appears strategic—casting misreporting funds in a significantly more positive position than is actually the case. Moreover, the misreporting has a real impact on investor behavior and mutual fund success.

Specifically, we focus on the fixed income mutual fund market. The entirety of the fixed income market is similarly sized to equites (e.g., 40 trillion dollars compared with 30 trillion dollars in equity assets worldwide). However, bonds are both fundamentally different as an asset cash-flow claim, along with having different attributes in delegated portfolios. While equity funds hold predominantly the same security type (e.g., the common stock of IBM, Tesla, etc.), each of a fixed income funds’ issues differ in yield, duration, covenants, etc.—even across issues of the same underlying firm—making them more bespoke and unique. While the SEC mandates equivalent disclosure of portfolio constituents for equity and bond mutual funds, this data is more complex in both processing and aggregating to fund-level measures for fixed income.

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