How smart is smart money? Evidence from mutual funds' exposure on corporate misconduct

Dongmin Kong and Zhao Zhao

Journal of Financial Research, 2025, vol. 48, issue 3, 1131-1159

Abstract: We examine how mutual funds' trading and performance respond to corporate misconduct. We exploit a combined dataset of corporate misconduct and holding information of mutual funds and find that mutual funds tend to not only sell but also buy more stocks of corporations with misconduct. Moreover, the exposure to misconduct stocks is negatively related to mutual funds' future performance. The top quintile portfolio of funds with the highest level of misconduct exposure underperforms the bottom quintile by 1.57% to 1.97% on an annualized basis. This performance gap is wider when it is easier for fund managers to gain information advantages.

Date: 2025
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https://doi.org/10.1111/jfir.12448

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfnres:v:48:y:2025:i:3:p:1131-1159

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