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Investor learning and mutual fund flows

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  • Jennifer Huang
  • Kelsey D. Wei
  • Hong Yan

Abstract

This paper investigates how volatility of performance affects the sensitivity of mutual fund flows to past performance, and examines how investor learning may contribute to this effect. We illustrate theoretically that when sophisticated investors learn from past fund performance to form their posterior expectations of managerial ability, the flow‐performance sensitivity should be weaker for funds with more volatile past performance. Moreover, the dampening effect of performance volatility on the flow‐performance sensitivity should be stronger for funds attracting more sophisticated investors. We provide supporting evidence for this investor learning hypothesis using mutual fund flows and demonstrate variations in the volatility dampening effect across funds with differing levels of sophistication among investors, such as load versus no‐load, high‐expense versus low‐expense, retail versus institutional, and star versus nonstar funds.

Suggested Citation

  • Jennifer Huang & Kelsey D. Wei & Hong Yan, 2022. "Investor learning and mutual fund flows," Financial Management, Financial Management Association International, vol. 51(3), pages 739-765, September.
    • Handle: RePEc:bla:finmgt:v:51:y:2022:i:3:p:739-765
    DOI: 10.1111/fima.12378
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    References listed on IDEAS

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    Cited by:

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    2. Richard Evans & Javier Gil‐Bazo & Marc Lipson, 2024. "Mutual fund performance and manager assets: The negative effect of outside holdings," Financial Management, Financial Management Association International, vol. 53(1), pages 3-29, March.
    3. Dimitris Papadimitriou & Konstantinos Tokis & Georgios Vichos & Panos Mourdoukoutas, 2024. "Managing other people's money: An agency theory in financial management industry," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 47(1), pages 179-209, March.
    4. Covachev, Svetoslav & Yadav, Vijay, 2024. "Effect of sectoral holdings on the flow-performance sensitivity of mutual funds," The North American Journal of Economics and Finance, Elsevier, vol. 69(PB).
    5. Dachen Sheng & Heather A. Montgomery, 2024. "Assessing Mutual Fund Performance in China: A Sector Weight-Based Approach," Mathematics, MDPI, vol. 12(16), pages 1-21, August.
    6. Sara Ali & Ihsan Badshah & Riza Demirer & Prasad Hegde, 2023. "Economic policy uncertainty and fund flow performance sensitivity: Evidence from New Zealand," International Review of Finance, International Review of Finance Ltd., vol. 23(3), pages 666-679, September.

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