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Economic Optimism, Information Uncertainty and Future Investment Decisions: Evidence from the Mutual Fund Industry

44 Pages Posted: 1 Jan 2012 Last revised: 3 Sep 2012

Saurin Patel

University of Western Ontario - Finance-Economics Area Group

Multiple version iconThere are 2 versions of this paper

Date Written: August 2012

Abstract

This paper examines whether investors' optimism about the future economic growth affects their future investment decisions. Drawing from the insights of the theoretical literature on investment behavior, we argue that investors base their future investment decisions not only on asset-specific information and existing macroeconomic environment, but also on their beliefs about future economic growth. Consistent with this premise, we find that investors' investment decisions, measured by mutual fund flows, are positively influenced by their economic optimism, even after controlling for various fund characteristics and macroeconomic conditions. Moreover, this effect is more pronounced for funds with greater fund-specific information uncertainty, i.e. funds that are small, belong to smaller fund families, or have highly volatile past performance. Our results suggest that investors not only consider forward-looking economic optimism in their investment decisions, but also put greater weight on it when fund-specific information seems uninformative and less valuable.

Keywords: Fund Purchase Decisions, Economic Optimism, Information Uncertainty, Mutual Fund Flows

JEL Classification: G10, G11, G20, G23

Suggested Citation

Patel, Saurin, Economic Optimism, Information Uncertainty and Future Investment Decisions: Evidence from the Mutual Fund Industry (August 2012). Available at SSRN: https://ssrn.com/abstract=1977974 or http://dx.doi.org/10.2139/ssrn.1977974

Saurin Patel (Contact Author)

University of Western Ontario - Finance-Economics Area Group ( email )

1255 Western Road
Room 2303
London, Ontario N6G 0N1
Canada
519-661-4195 (Phone)

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