Mutual Fund Flows and Investor Disappointment

Authors

Hendrik Bessembinder, W.P. Carey School of BusinessFollow
Shuaiyu Chen, Purdue University - Mitchell E. Daniels, Jr. 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

4-17-2023

Abstract

Mutual fund flows are negatively related to fund performance more than about five years prior. This finding holds for active U.S. and global equity funds, for both institutional and retail share classes, and across fund style categories. We develop and test the investor disappointment hypothesis, which posits that those who extrapolate from recent high returns are subsequently disappointed on average, and which implies both negative flow-performance coefficients at longer lags and interaction effects between recent and distant returns. The empirical evidence supports this hypothesis over the alternative that the negative coefficients at long lags are attributable to investor life cycles.

Document Type

Article

Keywords

Fund flow, fund returns, investor extrapolation

Disciplines

Corporate Finance

DOI

10.2139/ssrn.4421632

Language

English