Mutual Fund Flows at Long Horizons

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

7-8-2024

Abstract

We document that increased mutual fund flows after high returns are partially reversed at longer horizons, attributable to greater outflows rather than reduced inflows. We test theories with potential to explain this flow reversal: investment lifecycles, tax loss selling, and a behavioral "disappointment" hypothesis that is based on investor overreactions to recent positive returns. While tax loss selling contributes to explaining outflows, the evidence most strongly supports the behavioral explanation. As predicted, outflow coefficients are positive when recent returns are normal, and outflow magnitudes depend on differences between recent returns and the prior returns that attracted inflows, even after allowing for direct effects of recent returns.

Document Type

Article

Keywords

Fund flow, Fund Return, Disappointment

Disciplines

Corporate Finance

DOI

10.2139/ssrn.4421632

Language

English