We show that poor mutual fund performance can result from agency problems that drive fund inceptions. Funds created to exploit investor irrationality have different portfolio compositions at inception, loading heavily on past winner stocks. Investors reward these funds with abnormally high...

We show that some mutual funds are created to exploit investor irrationality and prioritize raising short-term capital over value creation. We find that capital flows into new funds, which lack performance histories, are especially sensitive to portfolio compositions. Funds loading heavily on...

There are large cross-sectional differences in the probability and magnitude of mispricing among stocks. Mispricing is traditionally attributed to stock-specific frictions. We show that mispricing can be explained in a rational equilibrium where investors allocate investigative resources to...