Stock Repurchasing Bias of Mutual Funds

Abstract

We show that mutual fund managers' trading experiences bias their future repurchasing decisions. Specifically, a stock's repurchasing probability at a given fund is 17% larger if it was previously sold for a gain rather than for a loss. In line with positive trading experience driving repurchasing decisions, we find that fund managers still prefer to repurchase stocks sold for a gain at a fund they managed before if they switch to a new fund. In addition, repurchasing bias is stronger if the previous sale is more salient to fund managers, and thus should be more easily remembered. Repurchasing bias is weakly associated with lower fund performance: repurchased winner stocks underperform repurchased loser stocks by around 5% p.a., which is mainly due to mean-reversion of stock returns.

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

JEL Classification: G11, G23, G41