Mutual Fund Flows at Long Horizons

Authors

Hendrik Bessembinder, W.P. Carey School of BusinessFollow
Shuaiyu Chen, University of Virginia - Darden School of BusinessFollow
Michael J. Cooper, University of Utah - David Eccles School of BusinessFollow
Jinming Xue, Southern Methodist University (SMU) - Finance DepartmentFollow
Feng Zhang, Southern Methodist University (SMU) - Finance DepartmentFollow

Publication Date

4-1-2023

Abstract

We show that positive flows to active mutual funds with high recent returns are partially reversed at longer horizons. This outcome is robust across a broad range of alternative specifications. The reversal is due to greater outflows associated with high prior returns, not reduced inflows. We test theories with potential to explain the reversal: investment lifecycles, tax loss selling, and a behavioral “disappointment” hypothesis based on investors’ overreaction to positive returns. While tax loss selling and short investor lifecycles can both contribute, the evidence supports a role for investor disappointment, whereby investors redeem when return performance fails to meet expectations.

Document Type

Article

Keywords

Fund flow, Fund Return, Disappointment

Disciplines

Corporate Finance

Language

English