Mutual Fund Flows and Investor Disappointment

68 Pages Posted: 28 Apr 2023 Last revised: 26 Oct 2023

See all articles by Hendrik Bessembinder

Hendrik Bessembinder

W.P. Carey School of Business

Shuaiyu Chen

Purdue University - Mitchell E. Daniels, Jr. School of Business

Michael J. Cooper

University of Utah - David Eccles School of Business

Jinming Xue

Southern Methodist University (SMU) - Finance Department

Feng Zhang

Southern Methodist University (SMU) - Finance Department

Date Written: April 17, 2023

Abstract

Mutual fund flows are negatively related to fund performance more than about five years prior. This finding holds for active U.S. and global equity funds, for both institutional and retail share classes, and across fund style categories. We develop and test the investor disappointment hypothesis, which posits that those who extrapolate from recent high returns are subsequently disappointed on average, and which implies both negative flow-performance coefficients at longer lags and interaction effects between recent and distant returns. The empirical evidence supports this hypothesis over the alternative that the negative coefficients at long lags are attributable to investor life cycles.

Keywords: Fund flow, fund returns, investor extrapolation

JEL Classification: G10, G23

Suggested Citation

Bessembinder, Hendrik (Hank) and Chen, Shuaiyu and Cooper, Michael J. and Xue, Jinming and Zhang, Feng, Mutual Fund Flows and Investor Disappointment (April 17, 2023). SMU Cox School of Business Research Paper No. 23-06, Available at SSRN: https://ssrn.com/abstract=4421632 or http://dx.doi.org/10.2139/ssrn.4421632

Hendrik (Hank) Bessembinder

W.P. Carey School of Business ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

HOME PAGE: http://isearch.asu.edu/profile/2717225

Shuaiyu Chen

Purdue University - Mitchell E. Daniels, Jr. School of Business ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
5853198838 (Phone)
47906-1744 (Fax)

Michael J. Cooper

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Jinming Xue (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States
(214)-768-4181 (Phone)

HOME PAGE: http://sites.google.com/view/jinming-xue

Feng Zhang

Southern Methodist University (SMU) - Finance Department ( email )

SMU Cox School of Business
6212 Bishop Blvd
Dallas, TX 75275
United States

HOME PAGE: http://https://sites.google.com/view/fengzhangfin

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