Belief Dispersion in the Chinese Stock Market and Fund Flows

Abstract

This study explores how Chinese mutual fund managers' degrees of disagreement (DOD) on stock market returns affect investor capital allocation decisions using a novel text-based measure of expectations in fund disclosures. In the time series, the DOD negatively predicts market returns. Cross-sectional results show that investors correctly perceive the DOD as an overpricing signal and discount fund performance accordingly. Flow-performance sensitivity (FPS) is diminished during high dispersion periods. The effect is stronger for outperforming funds and funds with substantial investments in bubble and high-beta stocks, but weaker for skilled funds. We also discuss financial sophistication of investors and provide evidence that our results are not contingent upon such sophistication.

Keywords: Mutual fund, Stock market expectation, Belief dispersion, Flow-performance sensitivity, Textual analysis