Managerial Career Concern and Mutual Fund Short-termism

Abstract

Mutual fund investors reward short run performance with large inflows. Fund managers facing strong performance-related flows are shown to focus more on short horizon investments. Further tests of causality suggest that fund manager’s short investment horizons are caused by their investors’ short horizons, but not the other way around. Fund managers subject to severe short-term tend to invest in larger stocks and growth stocks. Controlling for size, book-to-market and momentum effects, the stocks invested by higher turnover fund managers tend to generate lower return going forward, consistent with a hypothesis that these fund managers are inflating the demand for shorter-horizon investment opportunities and neglecting longer-horizon investment opportunities. The portfolio formed based on shorting the high turnover stocks and longing the lowest turnover stocks generates substantial abnormal return during 1992 to 2003.