Inattentive Investors And Mutual Fund-Flows
Author(s) Apoorva Javadekar


Gruber (1996) drew attention to performance-chasing behavior exhibited by mutual fund investors. In this paper, I uncover a large heterogeneity in fund flow-performance sensitivity (fps) between and within mutual funds after conditioning the results on the prior performance of the fund . I explain this dependence of fps on fund’s prior performance using the existence of inattentive investors as hypothesized by Christoffersen and Musto (2002). Further I present various tests to pin down this mechanism by conditioning the results on type of funds, or investment styles, market states which are more likely to attract inattentive investors. I present a novel evidence that funds with poor past performance are more likely to increase fees given their low fps. I further show that this fee increase does not lead to additional fund outflows as it should within rational expectations model.

Download Paper