Implied cost of capital and mutual fund performance

Mario Hendriock

No 20-11, CFR Working Papers from University of Cologne, Centre for Financial Research (CFR)

Abstract: This study provides evidence for a positive association between mutual fund holdings'implied cost of capital (ICC) and future performance. Consistent with large transactioncosts of ICC-based investments impeding their exploitation and employing a ICC-basedstrategy reflecting skill, family-level trading efficiency and manager-level SAT scorepositively correlate with fund-level ICC. A negative association between ICC and mid-year risk shifting corroborates the notion of fund managers decisively choosing andrelying on high-ICC strategies. Institutional investors able to identify funds with highICC direct their investments accordingly, whereas flows of retail funds are unaffected,consistent with limited investor attention and financial literacy.

Keywords: implied cost of capital; mutual funds; portfolio choice; financial forecasting (search for similar items in EconPapers)
JEL-codes: G11 G14 G17 G23 G31 M41 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cfn, nep-cwa, nep-fle and nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfrwps:2011

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