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Salience theory and mutual fund flows: Empirical evidence from China

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  • Hu, Shiyang
  • Xiang, Cheng
  • Quan, Xiaofeng

Abstract

Using a sample of Chinese mutual funds during 2004–2020, we provide empirical evidence on the salience theory, which argues that individuals' decision weights on risky asset choices are distorted in favor of salient payoffs. Specifically, we document robust and casual impacts of funds' salience theory values on their future flows. The impacts are not explained by investors' attention-driven purchases, funds' lottery-like features, or the characteristics of funds' underlying stocks. Further tests show that the impacts are larger for funds with more shares held by individual investors and are more pronounced when investor sentiment is higher.

Suggested Citation

  • Hu, Shiyang & Xiang, Cheng & Quan, Xiaofeng, 2023. "Salience theory and mutual fund flows: Empirical evidence from China," Emerging Markets Review, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:ememar:v:54:y:2023:i:c:s1566014122001054
    DOI: 10.1016/j.ememar.2022.100988
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    More about this item

    Keywords

    Salience theory; Limited attention; Mutual fund flows; MAX effect; Lottery preferences;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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