Measuring Innovation and Product Differentiation: Evidence from Mutual Funds |
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| Authors: | LEONARD KOSTOVETSKY JEROLD B. WARNER |
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| Affiliation: | Leonard Kostovetsky is at the Carroll School of Management, Boston College. Jerold Warner is with the Simon Business School, University of Rochester. We thank Dan Burnside, Ronald Goettler, Ron Kaniel, Fabio Moneta, Jonathan Reuter, participants at the Boston College seminar and Telfer Conference, as well as Editor Stefan Nagel, an anonymous associate editor, and two referees for their helpful comments. The authors do not have any potential conflicts of interest to disclose, as identified in The Journal of Finance Disclosure Policy. |
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| Abstract: | We study innovation and product differentiation using a uniqueness measure based on textual analysis of prospectuses. We find that small and start-up families have higher start rates than larger families, and their products are more unique. Unique strategies attract more inflows in the first three years, and investors respond more to text-based uniqueness than other measures such as holdings or returns uniqueness. For established funds, word uniqueness has weak negative power for explaining returns, so investors in competitive equilibrium do not sacrifice much performance to get specialized products. Uniqueness attenuates the flow-performance relation, reducing the risk of investor outflows. |
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