Participation Costs and the Sensitivity of Fund Flows to Past Performance

55 Pages Posted: 30 Mar 2005

See all articles by Jennifer C. Huang

Jennifer C. Huang

University of Texas at Austin - Department of Finance

Hong Yan

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Kelsey D. Wei

University of Texas at Dallas

Date Written: September 2006

Abstract

We present a simple rational model to highlight the effect of investors' participation costs on the response of mutual fund flows to past fund performance. By incorporating participation costs into a model in which investors learn about managers' ability from past returns, we show that mutual funds with lower participation costs have a higher flow sensitivity to medium performance and a lower flow sensitivity to high performance than their higher-cost peers. Using various fund characteristics as proxies for the reduction in participation costs, we provide empirical evidence supporting the model's implications for the asymmetric flow-performance relationship.

Keywords: Mutual fund, transaction costs

Suggested Citation

Huang, Jennifer Chunyan and Yan, Hong and Wei, Kelsey D., Participation Costs and the Sensitivity of Fund Flows to Past Performance (September 2006). 7th Annual Texas Finance Festival Paper; EFA 2004 Maastricht Meetings Paper No. 4718. Available at SSRN: https://ssrn.com/abstract=567050 or http://dx.doi.org/10.2139/ssrn.567050

Jennifer Chunyan Huang (Contact Author)

University of Texas at Austin - Department of Finance ( email )

McCombs School of Business, B6600
Austin, TX 78712
United States
512-232-9375 (Phone)
512-471-5073 (Fax)

Hong Yan

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Kelsey D. Wei

University of Texas at Dallas ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
9728835978 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
642
Abstract Views
3,670
rank
39,549
PlumX Metrics