This paper studies the effect of Morningstar ratings on fund flows and fund performance predictability using a proprietary data set of equity funds from Norway. Controlling for a number of variables proxying for fund and firm visibility, we find that fund flows respond asymmetrically to changes in Morningstar ratings. Specifically, 4– and 5–star rated funds get more flows, and funds upgraded to 5–star get significantly more flows not only in the next month, but also over the following 12 months after the rating change. Downgraded funds suffer outflows, but the results only become statistically significant when fund performance falls to a 2–star rating. We also find evidence of long–term performance predictability for top–rated funds. As the mutual fund industry develops worldwide, our results suggest that Morningstar has been successful in bringing its brand name to markets outside the United States, and that Morningstar ratings are a valuable tool for helping investors make strong investment decisions.

We thank Morningstar Norway, particularly Ketil Myhrvld and Afsheen Azam. They made this paper possible through providing essential data. We also thank two anonymous referees for comments. This research is supported by a grant from the Fundação para a Ciê

Mutual funds,Morningstar ratings,Fund flows,Fund performance,Investor behavior

• Economics and Business - Social Sciences