Financial Intermediaries vs. Capital Allocation: The Forgotten Role of Mutual Funds

Massimo Massa, Yanbo Wang and Hong Zhang

No 19488, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Recent evidence raises concerns regarding the efficacy of U.S. firms in allocating equity capital to more productive sectors. Can financial intermediaries help achieve better allocation? We document that actively managed U.S. open-end equity mutual funds exhibit significant allocational efficiency, surpassing that of firms or alternative sources (e.g., benchmarks and analyst forecasts). The efficiency gain arises from active capital management by fund managers, implying a novel source of managerial skills that enables funds to deliver superior performance. Our results suggest that financial intermediation conducted by mutual funds plays an important role in helping the market achieve allocational efficiency.

Date: 2024-09
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