How Does Investor Short-termism Affect Mutual Fund Manager Short-termism

Abstract

This paper studies short-termism of mutual funds, both short-termism of fund investors and short-termism of investments made by fund managers. The empirical results are consistent with the view that short investment horizons of fund managers (which we term output short-termism) are positively related to their investors’ short investment horizons (which we term input short-termism). Further tests of causality suggest that fund manager investment short-termism is caused by investor short horizon, but not the other way round. The study contributes to a better understanding of why fund managers tend to exhibit short-term decision making. It also provides supporting evidence of theoretical models of managerial myopic reaction to investor short-termism as in Stein (1988, 1989) and Shleifer and Vishney (1990).