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The purpose of this paper is to study how the target fund in mutual fund mergers performed compared to the acquiring funds had they not been merged but continued on their own as buy-and-hold portfolios.

The authors develop a novel approach to examine post-merger wealth effects. The authors’ study how the target portfolios would have performed compared to the funds acquiring them had they not been merged but continued on their own as passive portfolios. The data set consists of 793 merging US equity funds from January 2003 to December 2014.

The authors find that the target portfolio shareholders would have been better off if the target fund had been converted from an actively managed fund to a passively managed fund that maintained their current holdings.

The findings are the opposite to many previous studies who view target fund shareholders as the major beneficiaries in mutual fund mergers.

Investors receiving notification of their fund merging should reconsider their investment strategy. If they wish to maintain the original strategy of their fund, they should oppose the merger. Alternatively they may withdraw their money from the (soon-to-be) merged fund, replicate the latest portfolio of their fund, and buy-and-hold that portfolio.

The authors develop a novel approach to examine post-merger wealth effects.