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Berk and Green (2004) posit that as expenses increase and funds become less attractive relative to passive alternatives, managers are able to earn equilibrium compensation with a smaller amount of assets under management. Mutual fund acquisitions provide an empirical laboratory with little asymmetric information or moral hazard in which the hypothesis developed by Berk and Green can be tested. For a sample of 3902 mutual fund acquisitions over the period 1993-2002, empirical evidence is found in support of this hypothesis. This study shows that pre-acquisition expense ratios are statistically lower than the objective average and increase significantly following the change in fund complex ownership, while the investment objective, trading activity, and fund performance undergo little change.
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