Mutual funds and mispriced stocks

Doron Avramov, Si Cheng, Allaudeen Hameed

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

We propose a new measure of fund investment skill, active fund overpricing (AFO), encapsulating the fund's active share of investments, the direction of fund active bets with regard to mispriced stocks, and the dispersion of mispriced stocks in the fund's investment opportunity set. We find that fund activeness is not sufficient for outperformance: high (low) AFO funds taking active bets on the wrong (right) side of stock mispricing achieve inferior (superior) fund performance. However, high AFO funds receive higher flows during periods of high investor sentiment, when the performance-flow relation becomes weaker.

Original languageEnglish (US)
Pages (from-to)2372-2395
Number of pages24
JournalManagement Science
Volume66
Issue number6
DOIs
StatePublished - Jun 2020
Externally publishedYes

Keywords

  • Managerial skills
  • Mispricing
  • Mutual funds

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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