Article ID: | iaor2009770 |
Country: | United Kingdom |
Volume: | 62 |
Issue: | 3 |
Start Page Number: | 1273 |
End Page Number: | 1311 |
Publication Date: | Jun 2007 |
Journal: | Journal of Finance |
Authors: | Yan Hong, Huang Jennifer, Wei Kelsey D. |
Keywords: | investment |
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.