Selling Winners, Holding Losers: Effect on Fund Flows and Survival of Disposition-Prone Mutual Funds
56 Pages Posted: 16 Feb 2009
Date Written: February 13, 2009
We examine whether U.S. equity mutual funds exhibit a disposition bias, the tendency to sell winners and hold losers, and how this influences performance, investor flows and fund survival. About 30% of all funds exhibit some degree of disposition behavior. Funds with a disposition bias underperform funds that are not disposition prone by 4-6% per year. Moreover, even after controlling for performance, tax overhang and other factors that potentially affect flows, funds with a disposition bias attract significantly smaller flows than other funds. These results suggest that performance and tax efficiency are all important to mutual fund investors.
Rational explanations for a disposition bias are not supported by the evidence. However, we find that mutual fund investors are smart enough to minimize investment in disposition-prone funds. As a result, these funds have significantly higher rates of failure than other funds, thereby potentially reducing the impact of irrational trading behavior on security prices.
Keywords: disposition-prone, fund flows, mutual funds
JEL Classification: G14, G23
Suggested Citation: Suggested Citation