The Effects of Misperceived Managerial Skills: Evidence from Chinese Mutual Funds

Yue Cai
Additional contact information
Yue Cai: Faculty of Economics, Gakushuin University

No 2412, Working Papers from Waseda University, Faculty of Political Science and Economics

Abstract: Many mutual fund investors rely primarily on past performance and likely do not engage in sophisticated analysis of managers' alpha when making investment decisions. This paper explores how investors' misperception of managerial skill affects mutual funds' market power and investors' welfare, using data from China's mutual fund market. Our findings indicate that investors often confuse the effects of fund exposures to common systematic factors with genuine managerial skill, thereby increasing the market power of funds. Market power of funds are higher when investor demand arises from factor-related returns. Counterfactual experiments suggest that employing more sophisticated asset pricing models to assess fund managerial skills can enhance investor welfare. For instance, basing investment decisions on performance adjusted by a 4-factor model could increase investor welfare by $203 to $674 per year for each investor

Pages: 34 pages
Date: 2025-01
New Economics Papers: this item is included in nep-cna
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.waseda.jp/fpse/winpec/assets/uploads/2 ... 0d2d0273a4f9d3b4.pdf First version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wap:wpaper:2412

Access Statistics for this paper

More papers in Working Papers from Waseda University, Faculty of Political Science and Economics Contact information at EDIRC.
Bibliographic data for series maintained by Haruko Noguchi ().