Inattentive Investors and Mutual Fund-Flows

Apoorva Javadekar
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Apoorva Javadekar: Centre for Advanced Financial Research and Learning (CAFRAL)

Working Papers from Centre for Advanced Financial Research and Learning (CAFRAL)

Abstract: If you want to separate paragraphs, put an empty line. Do not include keywords or JEL codes, they each have a separate field. Gruber (1996) drew attention to performance-chasing behavior exhibited by mutual fund investors. In this paper, I uncover a large heterogeneity in fund flow-performance sensitivity (fps) between and within mutual funds after conditioning the results on the prior performance of the fund . I explain this dependence of fps on fund’s prior performance using the existence of inattentive investors as hypothesized by Christoffersen and Musto (2002). Further I present various tests to pin down this mechanism by conditioning the results on type of funds, or investment styles, market states which are more likely to attract inattentive investors. I present a novel evidence that funds with poor past performance are more likely to increase fees given their low fps. I further show that this fee increase does not lead to additional fund outflows as it should within rational expectations model.

Keywords: Mutual fund flows; Flow-Performance Sensitivity; Inattentive investors (search for similar items in EconPapers)
JEL-codes: G10 G11 G23 (search for similar items in EconPapers)
Pages: 38
Date: 2017-04
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