Working Paper: CEPR ID: DP10447
Authors: Si Cheng; Massimo Massa; Hong Zhang
Abstract: We investigate the impact of the absence of short selling on the pricing of managerial skills in the mutual fund industry. In the presence of divergent opinions regarding managerial skills, fund managers can strategically use fees to attract only the most optimistic capital. The recognition of this fee strategy helps explain a set of stylized observations and puzzles in the mutual fund industry, including the underperformance of active funds, the existence of flow convexity, and the negative correlation between gross-of-fee α and fees.
Keywords: managerial skills; mutual funds; short-sale constraint
JEL Codes: G1; G2; J0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| overpricing of managerial skills (L11) | underperformance of active funds (G23) |
| flow convexity (D11) | heightened by dispersion of opinion (D80) |
| short-sale constraints (G33) | overpricing of managerial skills (L11) |
| investor opinion dispersion (G24) | higher mutual fund fees (G23) |
| investor opinion dispersion (G24) | negative relationship between fund performance and fees (G23) |