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The Effects of Misperceived Managerial Skills: Evidence from Chinese Mutual Funds

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  • Yue Cai

    (Faculty of Economics, Gakushuin University)

Abstract

Many mutual fund investors rely primarily on past performance and likely do not engage in sophisticated analysis of managers' alpha when making investment decisions. This paper explores how investors' misperception of managerial skill affects mutual funds' market power and investors' welfare, using data from China's mutual fund market. Our findings indicate that investors often confuse the effects of fund exposures to common systematic factors with genuine managerial skill, thereby increasing the market power of funds. Market power of funds are higher when investor demand arises from factor-related returns. Counterfactual experiments suggest that employing more sophisticated asset pricing models to assess fund managerial skills can enhance investor welfare. For instance, basing investment decisions on performance adjusted by a 4-factor model could increase investor welfare by $203 to $674 per year for each investor

Suggested Citation

  • Yue Cai, 2025. "The Effects of Misperceived Managerial Skills: Evidence from Chinese Mutual Funds," Working Papers 2412, Waseda University, Faculty of Political Science and Economics.
    • Handle: RePEc:wap:wpaper:2412
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    References listed on IDEAS

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