Legality and the Spread of Voluntary Investor Protection

We examine the spread of Undertakings for Collective Investment
in Transferable Securities (UCITS) funds around the world and consi-
der whether such mutual funds, which voluntarily adopt higher stan-
dards of investor protection, expand their operations to other countries
with higher or lower investor protection regimes. The data indicate
equity funds spread to countries with better anti-director rights and
bond funds spread to countries with better creditor rights; however,
either type of spread is uncorrelated with and unexplained by enforce-
ment standards. The data therefore indicate that the loss of insider
managerial benefits from UCITS constraints is smaller in countries
where legal standards are higher, and this mechanism is a primary
determinant of the spread of voluntary protection mechanisms among
mutual funds. This central finding holds over a wide range of robust-
ness checks and the use of treatment-effect models that account for self
selection.