Fund performance-flow relationship and the role of institutional reform

  • Received February 3, 2018;
    Accepted March 7, 2018;
    Published March 23, 2018
  • Author(s)
  • DOI
    http://dx.doi.org/10.21511/imfi.15(1).2018.26
  • Article Info
    Volume 15 2018, Issue #1, pp. 311-327
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Extant literature shows the positive impact of institutional development on investor rationality and market efficiency. The authors extend this evidence by investigating the performance-flow relationship in the Chinese mutual fund market before and after the enforcement of the revised Law of the People’s Republic of China on Securities Investment Fund. Empirical evidence reveals that Chinese investors irrationally chase past star performers before institutional reform, but gradually become rational and less obsessed with star-chasing behaviors after reform. Moving one percentile upward in the relative performance among the star funds is associated with money inflows by 0.532% after reform, much lower than 1.433% before reform. The findings confirm the positive influence of institutional development on investor rationality and market efficiency. The successful experience can be borrowed by other emerging markets with less developed institutions.

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    • Table 1. Descriptions of control variables
    • Table 2. Descriptive statistics
    • Table 3. Regression results
    • Table 4. Two subperiods: pre- and post-reform periods
    • Table 5. Robustness test: the adoption of CAPM alpha and four-factor alpha
    • Table 6. Robustness test on two subperiods: CAPM alpha and four-factor alpha
    • Table 7. Robustness test: the adoption of tradable shares in computing pricing factors
    • Table 8. Robustness test on two subperiods: the adoption of tradable shares