How Smart is Smart Money? Evidence from Mutual Funds’ Exposure on Corporate Misconduct

37 Pages Posted: 28 Mar 2022

See all articles by Dongmin Kong

Dongmin Kong

School of Economics, Huazhong University of Science and Technology

Zhao Zhao

Huazhong University of Science and Technology - Department of Economics

Date Written: March 3, 2022

Abstract

We examine how mutual funds’ trading and performance respond to corporate misconduct. We exploit a combined dataset of corporate misconduct and holding information of mutual funds and show that mutual funds tend to sell and buy more stocks of corporations with misconduct. Mutual funds with more misconduct exposure perform significantly worse than those with less misconduct exposure. Specifically, the top quintile portfolio of funds with the highest levels of misconduct exposure underperforms the bottom quintile by 1.57% to 1.97% on an annualized basis. Findings show that mutual funds undergo significant losses by investing in misconduct firms, which is more likely to be motivated by overconfidence than limited recognition.

Keywords: mutual funds, corporate misconduct, performance, China.

Suggested Citation

Kong, Dongmin and Zhao, Zhao, How Smart is Smart Money? Evidence from Mutual Funds’ Exposure on Corporate Misconduct (March 3, 2022). Available at SSRN: https://ssrn.com/abstract=4049075 or http://dx.doi.org/10.2139/ssrn.4049075

Dongmin Kong (Contact Author)

School of Economics, Huazhong University of Science and Technology ( email )

Bldg. of Econ. School, Louyu Rd. 1037#
HUST, Hongshan Dist.
Wuhan, Hubei 430074
China

Zhao Zhao

Huazhong University of Science and Technology - Department of Economics ( email )

Wuhan, Hubei 430074
China

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