Selling Winners, Holding Losers: Effect on Mutual Fund Performance and Flows

In this dissertation, we examine whether the disposition effect, the tendency to sell winners and hold losers, exists among U.S. equity mutual funds and how the disposition effect influences fund performance and particularly flows. We find that a significant fraction (32%) of all funds exhibit some degree of disposition behavior. These funds underperform funds that are not disposition prone by 4-6% per year. Moreover, we find that the disposition effect has a significant impact on future fund flows. Without controlling for performance, disposition-prone funds experience 2-3% less flows each quarter than other funds. The difference in flows is probably due to poor performance of such funds. However, even after controlling for performance and other factors that potentially influence flows, funds with a high disposition effect experience 0.7-2% less flows than funds without such behavior. Past research has found that funds with low tax overhang garner larger inflows. Though disposition-prone funds are likely to have a lower tax overhang because they sell their winners quickly, we find that fund flows to disposition-prone funds are smaller than flows to non-disposition oriented funds after controlling for tax overhang. These results suggest that performance and tax efficiency as well as tax overhang are all important to mutual fund investors.

Name thesis:degree_name

Ph. D.

Level thesis:degree_level

doctoral

Discipline thesis:degree_discipline

Finance, Insurance, and Business Law

Department dc:contributor.department

Finance, Insurance, and Business Law

Grantor dc:publisher

Virginia Tech

Year dc:date.issued

2007

Author dc:creator

• Xu, Zhaojin

Chair dc:contributor.committeechair

• Singal, Vijay

Committee members dc:contributor.committeemember

• Keown, Arthur J.
• Ovtchinnikov, Alexei
• Cliff, Michael T.
• Kadlec, Gregory B.

• Fund Flows
• Mutual Funds
• Disposition Effect
• Capital Gains
• Tax Overhang
• Fund Performance

Statement dc:rights

• In Copyright

Licence dc:rights.uri

• http://rightsstatements.org/vocab/InC/1.0/

Dc Identifier Other

etd-05242007-144846

OAI identifier oai:identifier

oai:vtechworks.lib.vt.edu:10919/27878