Mutual Funds and Mispriced Stocks
Management Science, Vol. 66, No. 6, 2020
53 Pages Posted: 18 May 2015 Last revised: 9 Feb 2021
Date Written: January 19, 2019
We propose a new measure of fund investment skill, Active Fund Overpricing (AFO), encapsulating the fund’s active share of investments, the direction of fund active bets with regard to mispriced stocks, and the dispersion of mispriced stocks in the fund’s investment opportunity set. We find that fund activeness is not sufficient for outperformance: high (low) AFO funds take active bets on the wrong (right) side of stock mispricing achieve inferior (superior) fund performance. However, high AFO funds receive higher flows during periods of high investor sentiment, when performance-flow relation becomes weaker.
Keywords: Mutual funds; Managerial Skills; Mispricing
JEL Classification: G1, G2
Suggested Citation: Suggested Citation