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Does performance-chasing behavior matter? International evidence

Author

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  • Lee, Jennifer Eunkyeong
  • Cho, Hoon
  • Ryu, Doojin
  • Seok, Sangik

Abstract

We use funds of hedge funds data from more than 40 countries to analyze how investors’ performance-chasing behaviors affect subsequent fund performance. Fund performance improves when investors are sensitive to past performance. Higher flow-performance sensitivity (FPS) leads to better subsequent performance. A one-standard-deviation increase in FPS is associated with an increase of around 1% per annum in subsequent performance. The positive effect is stronger when fund flows are less affected by market uncertainty, when funds are less prone to decreasing returns to scale, and when funds have shorter share restriction periods. This positive effect varies across regions, and it is most significant in low individualistic countries, suggesting that investors in low individualistic countries can influence fund performance through their response to past performance.

Suggested Citation

  • Lee, Jennifer Eunkyeong & Cho, Hoon & Ryu, Doojin & Seok, Sangik, 2023. "Does performance-chasing behavior matter? International evidence," Journal of Multinational Financial Management, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:mulfin:v:68:y:2023:i:c:s1042444x2300018x
    DOI: 10.1016/j.mulfin.2023.100799
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    More about this item

    Keywords

    Flow-performance sensitivity; Hedge funds; Indirect incentives; International evidence;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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