Change is Good or the Disposition Effect Among Mutual Fund Managers
University of California, Davis - Graduate School of Management
Harvard Business School - Finance Unit
February 25, 2005
AFA 2006 Boston Meetings Paper
We document that mutual fund managers exhibit the disposition bias, or the tendency to hold on too long to poorly performing stocks. This bias arises because of the psychological unwillingness to admit past mistakes. We show that new fund managers, who are emotionally unattached to their predecessors' decisions, sell the momentum losers they have inherited more readily than continuing fund managers. They also sell more losers than winners, and this difference is higher than for continuing managers. The results are robust to various measures of trade and definitions of the control group. The effects are more pronounced when the outgoing manager is young, perhaps because new managers have less respect for the portfolio decisions of younger predecessors. Given that mutual funds hold a large fraction of the U.S. equity market, this finding may shed light on the origins of price momentum.
Number of Pages in PDF File: 28
Keywords: Disposition effect, mutual funds, managerial change, momentum
JEL Classification: G00, G12, G14, G23
Date posted: March 25, 2005
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