Portfolio Distortions Among Institutional Investors - Evidence from China

Abstract

The behavior of institutional investors often deviates from established personal or social norms, which may reflect either an informational advantage or psychological bias. In this paper, we investigate the incentives of Chinese mutual funds holding lottery-type stocks, which are characterized by low average returns and high risk. We find that funds at the aggregate level do not exhibit a propensity to gamble, but when they do, they earn abnormal returns on lottery-type investments. Gambling-related out performance is greater among held firms with characteristics which enable fund managers to obtain more informational advantages. Our results suggest that portfolio distortion is driven by the ability of managers to capitalize private information rather than by behavioral bias.

Keywords: gambling, mutual fund performance, informed trading

JEL Classification: G11, G23