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.

We evaluate how prior mutual fund working experience affects private fund managers' performance. Using a novel Chinese private fund database from 2012 to 2016, we document significantly lower excess returns and higher left-tail risks for private fund managers with prior mutual fund working experience. Such effect is concentrated in switched managers with lower performance ranks in mutual funds. Additionally, the underperformance is attributable to reduced research support, change in investment styles, and deteriorated market timing skills, while incentive schemes help alleviate such underperformance. Our findings demonstrate the key role of industry-specific human capital in the asset management industry.

We examine the information content of changes in shareholdings after private issuance of public equity (PIPE) by mutual funds that participate in PIPEs in China. The results show that the changes in shareholdings is positively related to alpha and cumulative abnormal return (CAR) for PIPE issuers with high information asymmetry, suggesting that the participating mutual funds have superior information. These results are robust after controlling for investment skill, geographic location, and alumni relation. The positive relation between shareholding change and information content is driven by PIPE issuers with weaker corporate governance. In addition, the positive relation is stronger when the placement discount is lower. These results are consistent with a hypothesis that controlling shareholders/management in Chinese PIPE firms may collude with mutual funds to do tunneling.

We examine how sell-side equity analysts strategically disclose information of differing quality to the public versus the buy-side mutual fund managers to whom they are connected. We consider cases in which analysts recommend that the public buys a stock, but some fund managers sell it. We measure favor trading using mutual fund managers’ votes for analysts in a Chinese “star analyst” competition. We find that managers are more likely to vote for analysts who exhibit more “say-buy/whisper-sell” behavior with these managers. This suggests that analysts introduce noise in their public recommendations, making the more-precise information provided to their private clients more valuable. Analysts’ say-buy/whisper-sell behavior results in information asymmetry: the positive-recommendation stocks bought by the managers who vote for the analysts outperform the stocks sold by these managers after the recommendation dates. Our findings help explain several puzzles regarding analysts’ public recommendations.

We document a novel platform effect caused by the emergence of FinTech platforms in financial intermediation. In China, platform distributions of mutual funds emerged in 2012 and grew quickly into a formidable presence. Utilizing the staggered entrance of funds onto platforms, we find a marked increase of performance-chasing, driven by the centralized information flow unique to FinTech platforms. This pattern is further confirmed using proprietary data from a top platform. Examining the platform impact on fund managers, we find that, incentivized by the amplified performance-chasing, fund managers increase risk taking to enhance their probability of getting onto the top ranking.

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 studies the economic impact of the emergence of FinTech platforms on financial intermediation. In China, platform distributions of mutual funds emerged in 2012 and grew quickly into a formidable presence. Utilizing the staggered fund entrance onto platforms, we find markedly increased flow sensitivities to performance. Akin to the winner-take-all phenomenon in the platform economy, net flow captured by top 10% performing funds more than triples its pre-platform level. This pattern of platform-induced performance chasing is further confirmed using private data from Howbuy, a top platform in China. Consistent with this added incentive of becoming top performers in the era of large-scale platforms, fund managers increase risk taking to enhance the probability of becoming top performers. Meanwhile, organizational cohesiveness of fund families weakens as platforms level the playing field for all funds.

We examine whether investor behavior can be influenced by the social norms to which they are exposed. Specifically, we test two competing hypotheses regarding the influence of social trust on the disposition effect related to mutual fund investment. On the one hand, a higher level of social trust may elicit stronger investor reactions by increasing the credibility of the performance numbers reported by funds. This results in higher flow-performance sensitivity, which mitigates investors’ tendency to sell winners and hold onto losers. On the other hand, societal trust may reduce concerns about expropriation, thereby weakening investors’ need to react to poor performance. The resulting lower flow-performance sensitivity increases the disposition effect. Based on a proprietary dataset of complete account-level trading information for all investors in a large mutual fund family in China, we find compelling evidence 1) of a significant disposition effect among fund investors; 2) that a higher degree of social trust is associated with higher flow-performance sensitivity; and 3) that (high) trust-induced flows mitigate the disposition effect. Our results suggest that, in addition to cognitive biases, investor behavior is also strongly influenced by social norms.

We study the effect of mutual fund allocation on China’s IPO market under the new registration system. The introduction of mutual fund bids significantly increases IPO offer price, resulting in a low initial short-term return and suppressed IPO underpricing. Those newly listed stocks witness lower volatility in the following weeks due to preferential allocation to the mutual fund at the primary market. Further analysis suggests that large investors tend to buy during the first week after IPO and their net purchase strengthens IPO after-market volatility. This new evidence suggests that mutual fund allocation plays a critical role in IPO price discovery and decreases investor lottery trading.