To explore what kinds of roles foreign investors take in a gradually opening financial market, we propose the abnormal holding value ratio (AHVR) of northbound investors among stocks through China’s Stock Connect Mechanism. We find that AHVR positively predicts the expected stock returns and significantly relates to firms’ quality-related fundamental information, especially profitability. Foreign investors learn the firm fundamentals before they invest in the Chinese market, which is different from the trading behavior of domestic individual investors. The AHVR premium is larger among firms with higher attention of analysts who focus on effective information and with lower attention of individual investors who have behavioral bias. In all, the northbound inflows are smart money, which will increase the efficiency of the Chinese market instead of simply chasing stars that only grab investors’ attention.

We examine how mutual funds’ trading and performance respond to corporate misconduct. We exploit a combined dataset of corporate misconduct and holding information of mutual funds and show that mutual funds tend to sell and buy more stocks of corporations with misconduct. Mutual funds with more misconduct exposure perform significantly worse than those with less misconduct exposure. Specifically, the top quintile portfolio of funds with the highest levels of misconduct exposure underperforms the bottom quintile by 1.57% to 1.97% on an annualized basis. Findings show that mutual funds undergo significant losses by investing in misconduct firms, which is more likely to be motivated by overconfidence than limited recognition.

This paper tests the smart money effects about equity mutual fund flow, and provides some good sights for the international investments. First, it provides some evidence of the outperformance of equity mutual funds using Chinese equity mutual fund data. Then it studies the determinants of mutual fund total net flows, individual net flows, and institutional net flows, and finds that the proportion fee plays an important role. Most importantly, I test the “smart money” effects, confirm its existence, and conclude that institutional net flows are smarter than individual net flows. Finally, I find that the proportion fee has a significant signal effect to direct the net flow of the new money.