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Mutual funds biased preference for the parent's stock: evidence and explanation

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  • Carlos Alves
  • Victor Mendes

Abstract

The potential manager-investor conflict of interests in mutual funds is a classic agency problem. Using a database from Portugal, we show that mutual funds tend to overweight the stocks issued by their parent and underweigh the stocks of competitors. This cannot be explained by performance, risk, securities' characteristics or information advantage; funds invest in the stock of their parent company especially when there is widespread selling, and avoid selling them when the stock is experiencing low performance. This agency relationship is costly for fund investors: compared with the competitor's stock, the parent's stock underperforms after being acquired by the fund.

Suggested Citation

  • Carlos Alves & Victor Mendes, 2010. "Mutual funds biased preference for the parent's stock: evidence and explanation," Applied Financial Economics, Taylor & Francis Journals, vol. 20(16), pages 1309-1320.
    • Handle: RePEc:taf:apfiec:v:20:y:2010:i:16:p:1309-1320
    DOI: 10.1080/09603107.2010.491439
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    References listed on IDEAS

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    1. Paul A. Gompers & Andrew Metrick, 1998. "How Are Large Institutions Different from Other Investors? Why Do These Differences Matter?," Harvard Institute of Economic Research Working Papers 1830, Harvard - Institute of Economic Research.
    2. Eduardo Borensztein & R. Gaston Gelos, 2003. "A Panic-Prone Pack? The Behavior of Emerging Market Mutual Funds," IMF Staff Papers, Palgrave Macmillan, vol. 50(1), pages 1-3.
    3. Carlos Alves & Victor Mendes, 2011. "Does performance explain mutual fund flows in small markets? The case of Portugal," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 10(2), pages 129-147, August.
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    Cited by:

    1. Carlos F. Alves & João Vaz Nunes & Ana Paula Serra, 2014. "Analysis of European Equity Funds Preferences for Stock Characteristics," FEP Working Papers 533, Universidade do Porto, Faculdade de Economia do Porto.

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