In the name of the law: How does legal distance affect US international mutual funds’ financial performance?

In this research, we investigate how the distance in legal features between investor and investee countries affects international mutual funds’ financial performance. We analyse a sample formed by 1160 US equity mutual funds in the period 2000–2021 (73,256 monthly portfolios) with an international investment vocation. Our results show that managers of mutual funds holding a portfolio that is exposed to more distant markets in terms of legal features jeopardize the financial performance delivered to investors. We also find a moderating factor whereby investing in larger stock markets alleviates the negative effect of the legal distance. • Home bias positively impacts international mutual funds’ financial performance. • Legal distance negatively impacts international mutual funds’ financial performance. • Investee markets capitalization moderates the negative impact of legal distance. • Our findings are robust when controlling for the subprime mortgage crisis. • Further research should explore alternative moderating factors for legal distance.