'Old' Money Matters: The Sensitivity of Mutual Fund Redemption Decisions to Past Performance

43 Pages Posted: 22 May 2006

See all articles by Zoran Ivkovich

Zoran Ivkovich

Michigan State University, Department of Finance

Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: May 18, 2006

Abstract

This paper shows that individual investors are reluctant to sell mutual funds that have appreciated in value and are willing to sell losers, in stark contrast to their stock trading where the disposition effect dominates. Comparison of trades in taxable and tax-deferred accounts suggests that a good share of this negative relation can be explained by tax-motivated trading, with the remainder of the negative relation consistent with investors' belief in fund performance persistence. Aggregating transaction-level data for a sample of individual investors to construct fund inflows and outflows, we find that both inflows and outflows of individual investors are sensitive to past performance, but in very different ways. Inflows are largely driven by relative performance, suggesting that new money chases the best performers in an objective, with little relation to the fund's absolute performance. In contrast, outflows are exclusively driven by the absolute performance of the fund, the relevant benchmark for tax purposes, with little relation to relative performance.

Keywords: Mutual fund flows, Individual investor portfolio choice, Capital gains lock-in, Behavioral finance

JEL Classification: G11, C41, D14, H20

Suggested Citation

Ivkovich, Zoran and Weisbenner, Scott J., 'Old' Money Matters: The Sensitivity of Mutual Fund Redemption Decisions to Past Performance (May 18, 2006). EFA 2006 Zurich Meetings Paper. Available at SSRN: https://ssrn.com/abstract=903792 or http://dx.doi.org/10.2139/ssrn.903792

Zoran Ivkovich (Contact Author)

Michigan State University, Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance ( email )

340 Wohlers Hall, MC-706
1206 S. Sixth Street
Champaign, IL 61820
United States
217-333-0872 (Phone)
217-244-9867 (Fax)

HOME PAGE: http://business.illinois.edu/weisbenn/

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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