How Do Mutual Fund Investors React to Text-Based Uncertainty?

This paper measures the extent of uncertainty in mutual fund communication and its effects on fund flows. I test the hypothesis that mutual funds communicating more about uncertainty might avoid large outflows. Investors appear to react to this form of communication, as the use of uncertain terms has a positive effect on fund flows for poorly performing funds. This finding helps explain the convexity of the flow-performance relationship. The effect of uncertainty language on flows cannot be explained by greater risk-taking from portfolio investments. A word embedding approach shows that broad market-related textual uncertainty discussion matters for fund flows, rather than specific risks. Investors' reaction to uncertainty in mutual fund communication results in misallocation of capital of across funds.