Investor behavior in the mutual fund industry: evidence from gross flows

George D. Cashman, Marquette University
Federico Nardari, University of Houston
Daniel N. Deli, DePaul University
Sriram V. Villupuram, Colorado State University - Fort Collins

Journal of Economics and Finance, Vol. 38, No. 4 (October 2014)L 541-567. DOI. © 2014 Springer International Publishing AG. Part of Springer Nature. Used with permission.

George D. Cashman was affiliated with Texas Tech University at the time of publication.


Using a large sample of monthly gross flows from 1997 to 2003, we uncover several previously undocumented regularities in investor behavior. First, investor purchases and sales produce fund-level gross flows that are highly persistent. Persistence in fund flows dominates performance as a predictor of future fund flows. More importantly, failing to account for flow persistence leads to incorrect inferences with respect to the relation between performance and flows. Second, we document that investors react differently to performance depending on the type of fund, and that investor trading activity produces meaningful differences in the persistence of fund flows across mutual fund types. Third, at least some investors appear to evaluate and respond to mutual fund performance over much shorter time spans than previously assessed. Additionally, we document differences in the speed and magnitude of investors’ purchase and sales responses to performance.