Participation Costs and the Sensitivity of Fund Flows to Past Performance
Jennifer C. Huang
University of Texas at Austin - Department of Finance
University of South Carolina; Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)
Kelsey D. Wei
University of Texas at Dallas
7th Annual Texas Finance Festival Paper
EFA 2004 Maastricht Meetings Paper No. 4718
We present a simple rational model to highlight the effect of investors' participation costs on the response of mutual fund flows to past fund performance. By incorporating participation costs into a model in which investors learn about managers' ability from past returns, we show that mutual funds with lower participation costs have a higher flow sensitivity to medium performance and a lower flow sensitivity to high performance than their higher-cost peers. Using various fund characteristics as proxies for the reduction in participation costs, we provide empirical evidence supporting the model's implications for the asymmetric flow-performance relationship.
Number of Pages in PDF File: 55
Keywords: Mutual fund, transaction costsworking papers series
Date posted: March 30, 2005
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