Flows, performance, and investor behavior: evidence from mutual funds in China

This study examines the investor behavior of mutual funds in China. Our results show little evidence about the redemption puzzle. We further refute the disposition effect, that is, investors do not tend to redeem funds with superior past performance. Additionally, market conditions are crucial for investment decisions. In bull markets, investors are prone to taking risks while being conservative and prudent during bad times. Considering investor heterogeneity, we find that institutional investors value the funds' past performance metrics, assigning greater weight to historical performance. Both institutional investors and individual investors show stronger sensitivity to complicated performance indicators in bad times than good times. Furthermore, we find that investors in China chase for the star funds. We also perform tests on the existence of the smart money effect, and the results show that investors can screen good funds from bad ones. This study examines the investor behavior of mutual funds in China. Our results show little evidence about the redemption puzzle. We further refute the disposition effect, that is, investors do not tend to redeem funds with superior past performance. Additionally, market conditions are crucial for investment decisions. In bull markets, investors are prone to taking risks while being conservative and prudent during bad times. Considering investor heterogeneity, we find that institutional investors value the funds' past performance metrics, assigning greater weight to historical performance. Both institutional investors and individual investors show stronger sensitivity to complicated performance indicators in bad times than good times. Furthermore, we find that investors in China chase for the star funds. We also perform tests on the existence of the smart money effect, and the results show that investors can screen good funds from bad ones. Overall, this study offers valuable insights into the decision-making processes of Chinese mutual fund investors, providing a more nuanced understanding of their behavior compared to established financial theories.