Economic Optimism, Information Uncertainty and Future Investment Decisions: Evidence from the Mutual Fund Industry

Abstract

This paper examines whether investors' optimism about the future economic growth affects their future investment decisions. Drawing from the insights of the theoretical literature on investment behavior, we argue that investors base their future investment decisions not only on asset-specific information and existing macroeconomic environment, but also on their beliefs about future economic growth. Consistent with this premise, we find that investors' investment decisions, measured by mutual fund flows, are positively influenced by their economic optimism, even after controlling for various fund characteristics and macroeconomic conditions. Moreover, this effect is more pronounced for funds with greater fund-specific information uncertainty, i.e. funds that are small, belong to smaller fund families, or have highly volatile past performance. Our results suggest that investors not only consider forward-looking economic optimism in their investment decisions, but also put greater weight on it when fund-specific information seems uninformative and less valuable.