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Belief dispersion in the Chinese stock market and fund flows

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  • Fang, Yue
  • Luo, Deming
  • Yao, Zhongwei

Abstract

This study explores how Chinese mutual fund managers’ degrees of disagreement (DOD) on stock market returns affect investor capital allocation decisions using a novel text-based measure of expectations in fund disclosures. In the time series, the DOD negatively predicts market returns. Cross-sectional results show that investors correctly perceive the DOD as an overpricing signal and discount fund performance accordingly. Flow-performance sensitivity (FPS) is diminished during high dispersion periods. The effect is stronger for outperforming funds and funds with substantial investments in bubble and high-beta stocks, but weaker for skilled funds. We also discuss the financial sophistication of investors and provide evidence that our results are not contingent upon such sophistication.

Suggested Citation

  • Fang, Yue & Luo, Deming & Yao, Zhongwei, 2024. "Belief dispersion in the Chinese stock market and fund flows," Journal of Banking & Finance, Elsevier, vol. 166(C).
    • Handle: RePEc:eee:jbfina:v:166:y:2024:i:c:s0378426624001663
    DOI: 10.1016/j.jbankfin.2024.107252
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    Keywords

    Mutual fund; Stock market expectation; Belief dispersion; Flow-performance sensitivity; Textual analysis;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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