Selling Winners, Holding Losers: Effect on Fund Flows and Survival of Disposition-Prone Mutual Funds

56 Pages Posted: 16 Feb 2009

See all articles by Lily Xu

Lily Xu

Washington State University

Vijay Singal

Virginia Tech

Date Written: February 13, 2009

Abstract

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

Xu, Lily and Singal, Vijay, Selling Winners, Holding Losers: Effect on Fund Flows and Survival of Disposition-Prone Mutual Funds (February 13, 2009). Available at SSRN: https://ssrn.com/abstract=1342889 or http://dx.doi.org/10.2139/ssrn.1342889

Lily Xu

Washington State University ( email )

Todd 484
PO Box 644746
Pullman, WA 99164-4746
United States
(509)335-5312 (Phone)
(509)335-3857 (Fax)

Vijay Singal (Contact Author)

Virginia Tech ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States
5402317750 (Phone)

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