Future Fund Flows Research Articles

Selling Winners, Holding Losers: Effect on Mutual Fund Performance and Flows

In this dissertation, we examine whether the disposition effect, the tendency to sell winners and hold losers, exists among U.S. equity mutual funds and how the disposition effect influences fund performance and particularly flows. We find that a significant fraction (32%) of all funds exhibit some degree of disposition behavior. These funds underperform funds that are not disposition prone by 4-6% per year Moreover, we find that the disposition effect has a significant impact on future fund flows. Without controlling for performance, disposition-prone funds experience 23% less flows each quarter than other funds. The difference in flows is probably due to poor performance of such funds. However, even after controlling for performance and other factors that potentially influence flows, funds with a high disposition effect experience 0.7-2% less flows than funds without such behavior. Past research has found that funds with low tax overhang garner larger inflows. Though disposition-prone funds are likely to have a lower tax overhang because they sell their winners quickly, we find that fund flows to disposition-prone funds are smaller than flows to non-disposition oriented funds after controlling for tax overhang. These results suggest that performance and tax efficiency as well as tax overhang are all important to mutual fund investors.

Investor Behavior in the Mutual Fund Industry: Evidence from Gross Flows

Using a large sample of monthly gross flows from 1997 to 2003, we uncover several previously undocumented regularities in investor behavior. First investor purchases and sales produce fund-level gross flows that are highly persistent. Persistence in fund flows dominates performance as a predictor of future fund flows. Also, failing to account for flow persistence leads to incorrect inferences with respect to the relation between performance and flows. Second, we document that investors react differently to performance depending on the type of fund, and that investor trading activity produces meaningful differences in the persistence of fund flows across mutual fund types. Third, at least some investors appear to evaluate and respond to mutual fund performance over much shorter time spans than previously assessed. Additionally, we document differences in the speed and magnitude of investors' purchase and sales responses to performance.

On the Consequences of Mutual Fund Tournaments

We analyze the implications of the tournament-like competition in the mutual fund industry for shareholder welfare using a framework that addresses both (a) the risk taking incentives, and (b) the effort incentives facing fund managers. We compare the ex ante shareholder utility under two competing regimes: (a) a tournament regime characterized by future fund flows accruing to the winner fund, and (b) a no-tournament regime in which future flows are not sensitive to past performance. Our analysis suggests that mutual fund tournaments can be beneficial when the informational costs and the cash flow sensitivity to past performance are moderate. Using monthly as well as daily data for a sample of domestic stock funds, we present empirical evidence consistent with the key predictions of our theoretical model.