Political corruption and local mutual fund performance

Abstract

This study investigates the impact of political corruption on the performance of local mutual funds. Using comprehensive U.S. mutual fund and state corruption data from 2003 to 2019, we find that local corruption is positively associated with fund performance. Mutual funds in the most corrupt states outperform those in the least corrupt states by 24 basis points annually, with results remaining consistent across various performance metrics. This counterintuitive finding suggests that fund managers in corrupt environments might develop superior information networks and local connections that provide them with valuable investment insights. The results indicate that institutional investors like mutual funds might be better positioned than other market participants to navigate and potentially benefit from corrupt environments.