Prior beliefs in market efficiency and fund cash flows

Yeonjeong Ha and Haejune Oh

Applied Economics, 2021, vol. 53, issue 59, 6878-6896

Abstract: This study investigates the effect of fund investors’ prior beliefs on flow-performance relationships. Nonmonotonic inflow- and outflow-performance relationships, with a monotonic relationship in net flows, suggest that more investors exhibit return-chasing behaviour but that some investors behave in a strongly biased manner; these phenomena exist in high-risk funds with extreme performance. With regard to investors’ prior beliefs in market efficiency to the fund performance, inflows and outflows have a monotonic relationship with performance. From these findings, the nonmonotonic relationship can be explained by the biased behaviour resulting from the lack of beliefs in market efficiency.

Date: 2021
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DOI: 10.1080/00036846.2021.1949434

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