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Investor Cash Flow and Mutual Fund Behavior

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  • Xiangbo Liu
  • Zijun Liu
  • Zhigang Qiu

Abstract

type="main"> We study the behavior of a mutual fund manager in a discrete-time model, in which new investors may choose to invest in the fund after the fund manager has made trading decisions. We show that under certain conditions the fund manager may choose to buy overvalued assets at the expense of the investors in order to attract new investments, who would otherwise not invest in the fund. This can potentially lead to higher risky asset prices and a higher-than-optimal proportion of investment in risky assets in the active fund management industry.

Suggested Citation

  • Xiangbo Liu & Zijun Liu & Zhigang Qiu, 2015. "Investor Cash Flow and Mutual Fund Behavior," Manchester School, University of Manchester, vol. 83(1), pages 56-71, January.
    • Handle: RePEc:bla:manchs:v:83:y:2015:i:1:p:56-71
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    File URL: http://hdl.handle.net/10.1111/manc.12053
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    References listed on IDEAS

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    1. Xuemin (Sterling) Yan, 2006. "The Determinants and Implications of Mutual Fund Cash Holdings: Theory and Evidence," Financial Management, Financial Management Association International, vol. 35(2), pages 67-91, June.
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    6. Shleifer, Andrei & Vishny, Robert W, 1997. "The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
    7. Russ Wermers, 2000. "Mutual Fund Performance: An Empirical Decomposition into Stock‐Picking Talent, Style, Transactions Costs, and Expenses," Journal of Finance, American Finance Association, vol. 55(4), pages 1655-1695, August.
    8. Gromb, Denis & Vayanos, Dimitri, 2002. "Equilibrium and welfare in markets with financially constrained arbitrageurs," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 361-407.
    9. , & ,, 2006. "Financial equilibrium with career concerns," Theoretical Economics, Econometric Society, vol. 1(1), pages 67-93, March.
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    Cited by:

    1. Aditya Prasad Sahoo, 2020. "Investor's Behavior and Mutual Fund - A Study in Cuttack City," ComFin Research, Shanlax Journals, vol. 8(4), pages 18-22, October.

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