Small-Cap Equity Mutual Fund Managers as Liquidity Providers

30 Pages Posted: 17 Aug 2010 Last revised: 20 Jan 2011

See all articles by Hany A. Shawky

Hany A. Shawky

State University of New York at Albany - School of Business and Center for Institutional Investment Management

Jianbo Tian

SUNY at Albany - Department of Economics

Date Written: July 1, 2010

Abstract

This paper examines the relation between the performance of small-cap equity mutual funds and the liquidity characteristics of their asset holdings. We study the trading behavior of fund managers and show that on average, they tend to buy less liquid stocks and sell the more liquid stocks. We introduce the notion of net “liquidity creation” by fund managers and examine its role in explaining the cross section of small-cap equity mutual fund returns. Our empirical results show that on average, small-cap mutual fund managers are able to earn an additional 1.5 percent return per year as compensation for providing such liquidity services to the market.

Keywords: Liquidity creation, expected returns, trading behavior, small-cap mutual funds, mutual fund performance, bid-ask spread, turnover ratio

JEL Classification: G11, G20, G30

Suggested Citation

Shawky, Hany A. and Tian, Jianbo, Small-Cap Equity Mutual Fund Managers as Liquidity Providers (July 1, 2010). Journal of Empirical Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1659281

Hany A. Shawky (Contact Author)

State University of New York at Albany - School of Business and Center for Institutional Investment Management ( email )

School of Business
1400 Washington Ave.
Albany, NY 12222
United States
518-442-4921 (Phone)
518-442-3944 (Fax)

Jianbo Tian

SUNY at Albany - Department of Economics ( email )

BA125A, 1400 Washington Ave,
Albany, NY 12222
United States

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