Stock Repurchasing Bias of Mutual Funds

56 Pages Posted: 14 Sep 2018 Last revised: 18 Sep 2018

See all articles by Mengqiao Du

Mengqiao Du

University of Mannheim - Department of Finance

Alexandra Niessen-Ruenzi

University of Mannheim - Department of Finance

Terrance Odean

University of California, Berkeley - Haas School of Business

Date Written: September 10, 2018

Abstract

This paper investigates whether the positive emotions mutual fund managers have when they have sold a stock for a gain lead to a higher repurchasing probability of this stock in the future. Controlling for fund, stock, and time fixed effects, we show that the probability of a stock being repurchased by a mutual fund is on average around 17% higher if it was previously sold for a gain rather than for a loss. The effect is less pronounced if the stock price has increased after the sale of the stock, which may cause regret and a negative feeling that the stock has been sold in the first place. In line with positive emotions driving the repurchasing behavior, we find that when fund managers change jobs and work at a different fund, they still prefer to repurchase stocks that they sold for a gain at the fund they managed before. We find supportive evidence that this behavior is associated with lower fund performance: repurchased winners underperform repurchased losers by around 5% p.a. after the repurchase. Thus, investors should be aware that mutual fund managers' repurchasing decisions can be biased and eventually may hurt their performance.

Keywords: Stock Repurchasing, Mutual Funds, Performance, Behavioral Bias

JEL Classification: G11, G23, G41

Suggested Citation

Du, Mengqiao and Niessen-Ruenzi, Alexandra and Odean, Terrance, Stock Repurchasing Bias of Mutual Funds (September 10, 2018). Available at SSRN: https://ssrn.com/abstract=3247066 or http://dx.doi.org/10.2139/ssrn.3247066

Mengqiao Du (Contact Author)

University of Mannheim - Department of Finance ( email )

L9, 1-2
Mannheim, 68161
Germany

Alexandra Niessen-Ruenzi

University of Mannheim - Department of Finance ( email )

Mannheim, 68131
Germany

Terrance Odean

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-6767 (Phone)
510-666-2561 (Fax)

HOME PAGE: http://www.haas.berkeley.edu/faculty/odean.html

Register to save articles to
your library

Register

Paper statistics

Downloads
158
Abstract Views
1,378
rank
186,222
PlumX Metrics