Does Financial Globalization Propagate Managerial Skills? Lessons from the Mutual Fund Industry

We examine whether globalization may unintendedly allow financial institutions with low managerial skills to grow. Using a complete sample of global mutual funds, we find that low-skilled fund companies may strategically differentiate their products by launching new funds that track less-explored foreign equity market indices. These new funds bring in asset growth to their managing companies, but fail to deliver performance or diversification benefits to their investors. Moreover, their associated cross-border capital flows reduce price efficiency and liquidity in the target country, suggesting that globalization is not necessarily accompanied with the propagation of the beneficial influence of managerial skills.