We examine the impact of political connections on the investment decisions of Chinese mutual funds. We identify a direct link between mutual funds’ political connections and stocks held from the same political network using hand-collected information on the professional backgrounds of Chinese mutual fund managers and fund management company (FMC) shareholders. While mutual funds tend to allocate more investments to stocks based on their political connections, this effect alleviates somewhat after the 2012 anti-corruption campaign. Our findings suggest that anti-corruption campaigns can help to reduce the political effects of government-related agencies on fund holdings and contribute to better market fairness.

Fund managers’ ability to evaluate risk has important implications for their portfolio management and performance. We use a state-of-the-art deep learning model to measure fund managers’ forward-looking risk assessments from their narrative discussions. We validate that managers’ negative (positive) risk assessments lead to subsequent decreases (increases) in their portfolio risk-taking. However, only managers who identify negative risk generate superior risk-adjusted returns and higher Sharpe ratios, and have better intraquarter trading skills, suggesting that cautious, skilled managers are less subject to overconfidence biases. interestingly, only sophisticated investors respond to the narrative-based risk assessment measure, consistent with limited attention by retail investors.

We uncover a signiffcant relationship between the persistence of marketing and investment skills among U.S. mutual fund companies. Using regulatory filings, we calculate the share of marketing-oriented employees to total employment and reveal alarge heterogeneity in its level and persistence. A framework based on costly signaling and learning helps explain the observed marketing decision. The model features a separating equilibrium in which fund companies’ optimal marketing employment share responds to their past performance differently, conditional on the skill level. We confirm the model prediction that the volatility of the marketing employment share negatively predicts the fund companies’ long-term performance.

Using unique data on Alipay users' investment accounts, we find that, in addition to generating better performance than investors’ self-directed portfolios, robo-advising has a positive spillover effect on its adopters in terms that it improves their investment behaviors. Investors have more diversified portfolios and exhibit fewer behavioral biases in portfolio management and fund choices in their self-directed accounts after adopting robo-advising. The spillover effect is more prominent for adopters who interact with the service more actively and who were less sophisticated before adopting the app. We also find that adopters learn from the robo-advisor by simply imitating its portfolios or strategies. Collectively, this study provides large-sample, non-laboratory evidence that robo-advising effectively plays a role in educating investors through repeated interactions with its adopters and setting investment models that are easy to follow.

As “sin” stocks and “brown” stocks generally earn higher returns than “green” stocks, fund managers face a trade-off between profitability and sustainability preferences when investing in environmental, social and governance (ESG). We explore the investment styles of ESG funds in the Chinese A-share market and analyze the behavior of ESG funds in terms of asset allocation and portfolio adjustment. We find that ESG funds prefer stocks with high return performance over stocks with high ESG performance. Textual analyses of prospectuses reveal a degree of “greenwashing” behavior by ESG funds. Overall, we show that ESG funds not purely ESG-driven.

Whether responsible investing reduces portfolio risk remains open to discussion. We study the relationship between ESG performance and downside risk at fund level in the Chinese equity mutual fund market. We find that fund ESG performance is positively associated with fund downside risk during the period between July 2018 and March 2021, and that the positive relationship weakens during the COVID-19 pandemic. We propose three channels through which fund ESG performance could affect fund downside risk: (i) the firm channel in which the risk-mitigation effect of portfolio firms’ good ESG practices could be manifested at fund level, (ii) the diversification channel in which the portfolio concentration of high ESG-rated funds could amplify fund downside risk, and (iii) the flow channel in which fund ESG performance may attract greater investor flows that could reduce fund downside risk. We show evidence that the observed time-varying relationship between fund ESG performance and downside risk is driven by the relative force of the three channels.

We study how professional fund managers’ growth expectations affect the actions they take with respect to equity investment and in turn the effects on prices. Using novel data on China’s mutual fund managers’growth expectations, we show that pessimistic managers decrease equity allocations and shift away from more-cyclical stocks. We identify a strong short-run causal effect of growth expectations on stock returns, despite statistically significant delays in price discovery from short-sale constraints. Finally, we find that an earnings-based measure of price informativeness is increasing in fund investment.

We examine the impact of institutional investor networks on firm innovation in China. Employing the unexpected departure of mutual fund managers and the inclusion of the Shanghai-Shenzhen 300 index as identifications, we find that institutional investor networks have a positive impact on firm innovation. Specifically, firms that are hold by well-connected institutional investors are motivated to make R&D investments and receive greater patents than their counterparts. This positive influence is more pronounced for non-SOEs and for firms located in less-developed regions, indicating that institutional investor networks act as information flow facilitator and a value certifier to encourage innovation activities.

The foreign capital flight amid pandemic outbreaks can result in propagation effects in the equity market. With a daily shareholding dataset, this paper investigates the trading behavior of foreign mutual funds in China when it was the epicenter of COVID-19 outbreaks and the subsequent period with global spreads. Using fixed effects and panel structural VAR models, we confirm propagation effects caused by the capital flight of foreign mutual funds. Substantial heterogeneities across foreign funds affiliated and unaffiliated with commercial banks have been uncovered, though they are both found to withdraw from risky stocks as an indication of a "flight to quality." Without implicit guarantees, unaffiliated foreign mutual funds liquidated immediately and more when the pandemic hit China. The resulting price shocks led to further deleverage by bank-affiliated foreign funds on their pre-pandemic risk exposure stocks. Our results shed new light on the behavioral theory of stock market trading featuring fund and stock exposure channels.

This study investigates Chinese equity mutual funds’ performances while holding those that are well behaved in financial disclosure (transparent) companies, so-called peace of mind investing. This study uses detailed semi-annual data on mutual funds from 2011 to 2020, and finds that holding these transparent companies’ stocks is profitable for mutual funds and trusted by investors, thereby boosting their inflows. However, there is no significant evidence that mutual funds can beat the market portfolio when fees are considered. The study then provides possible explanations for the above findings from mutual fund managers’ skills and mutual holdings between institutional shareholders of fund management and transparent companies.