Advertising and Portfolio Choice

by Henrik Cronqvist; WP CeRP N° 44/05


Using a unique large-scale event, the year 2000 launch of a privatized social security system involving individual savings accounts in Sweden, I report empirical evidence on the link between fund advertising and people’s fund and portfolio choices. First, content analysis reveals that a very small portion of ads can be construed as directly informative about characteristics relevant for rational mutual fund investors, such as funds’ expense ratios. Second, higher levels of advertising expenditures do not appear to signal ex ante higher unobservable fund manager quality or talent. Third, fund advertising affects people’s portfolio choices, even when advertising does not appear to contain any information. Finally, fund advertising steers people to portfolios with lower returns and higher risk. My results have important implications for a welfare analysis of fund advertising and portfolio choices, asset pricing models, and mutual fund industry policy making, and may serve as a starting point for wider and more formal analysis of the effects of advertising, marketing, and persuasion in financial markets.


November 2005


WP_44.pdf (PDF document — 1197 KB)