Understanding the Non-Linear Relation between Mutual Fund Performance and Flows
45 Pages Posted: 20 Mar 2008
Date Written: December 28, 2008
We examine gross flows to mutual funds and find that existing investors punish poorly performing funds by increasing outflows. We also find that existing and potential investors punish poorly performing funds by reducing inflows. Finally, we uncover that current investors respond to poor performance with the same intensity as they do to good performance. Overall, we conclude that new investors must drive the observed non-linearity between mutual fund performance and net flows. This conclusion runs contrary to the extant literature which generally ascribes the absence of net outflows in the face of poor performance to inactivity by existing fund investors (i.e., they do not exit).
Keywords: Mutual Funds, Performance-Flow Relation, Mutual Fund Flows
JEL Classification: G23, L14
Suggested Citation: Suggested Citation