Fund managers' herding and the sensitivity of fund flows to past performance

Lorenzo Casavecchia

International Review of Financial Analysis, 2016, vol. 47, issue C, 205-221

Abstract: This study provides a new explanation for the weak sensitivity of investors' flows to poor fund performance based on fund managers' incentives to herd from career concerns. We show that a manager's decision to trade with (against) the herd decreases (increases) significantly investors' willingness to redeem capital from underperforming funds. We argue that this differential investor reaction to poor performance conditional on herding explains the lower termination risk identified among herding managers. We also find that financial intermediaries do not mitigate this sub-optimal investors' response. Our findings support the view that underperforming funds can retain larger payoffs if they herd.

Keywords: Managerial herding; Flow-performance sensitivity; Career concerns (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:47:y:2016:i:c:p:205-221

DOI: 10.1016/j.irfa.2016.07.006

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