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The mutual fund merger is neither a rare nore recent phenomenon. During the period 1962-1999, one out of ever six open-end equity funds were merged out of business. Interestingly, the distribution of equity fund mergers clusters in the 1970s when volatile stock markets have a great adverse impact on the industry and in the 1990s when the industry grows rapidly with bullish stock markets. This paper investigates the determinants and consequences of mutual fund mergers. I hypothesize that mutual fund mergers play two roles in the fund dynamics - eliminating inefficient funds and supporting the growth of well-performing funds. Using a sample of 604 equity fund mergers from CRSP, I find that the acquired funds are small, underperform persistently, and experience net outflows. Logit regression results further show that funds with these attributes are more likely to be taken over. Acquiring funds' performance is above average in the pre-merger period, but deteriorates after mergers. I find some evidence that funds merge to exploit the economies of scale in fund management. Compared to acquired funds, liquidated funds are tiny and even younger. In conclusion, mutual fund mergers provide an exit mechanism for funds of small size or with inferior growth opportunity. |
