Opportunism Behavior Of Mutual Fund

Great growth and expansion of institutional investors is a necessary part and a symbol of mature financial markets.The rapid development of the financial institutions especially of mutual funds in China has contributed to its strong influence on the financial system.Mutual funds serves as an important financial institution,and plays an very important role in change and optimize the investor structure,especially played a great role in lowering the ratio of retail investors in the financial market,and have been earning high expectation from the regulators.The existence of mutual funds is quite important to financial market,the industry,as well as the corporate finance.In current researches,institutional investors,especially mutual funds,are usually treated as representative of sophisticated investors,and have played a great role in the development of capital market: First,compared with individual investors,mutual funds has advantages on sufficient fund,advanced technology and timely information.They can make decisions much more rationally.As a result of above advantages,typical mutual funds do not trade frequently as a typical individual investor usually does,thus making contribution to price efficiency and market stabilization.At the same time,Because of their professionalism,mutual funds also have advantages on interpreting and processing information about political and economic policies,they can follow the trend of economy and adjust their investment direction,scale and structure according to market condition,they can also implement investment policy efficiently in response to policy change,thus plays an integral role in stabilizing market and serving virtual economy.Finally,the difference between resource and ability of mutual funds as well as other institutional investors and individual investors brings the difference of behavior of these two kinds of investors.Thus the development of mutual funds also had the effect of richness market participants and increase market supply,thus contribute to additional improvement and development of the whole market.However,mutual funds also has limitations.For example,the fund performance evaluation system is almost “short-term” based.A lot of media and valuation institutions will even release fund performance data monthly or weekly.These short-term ranking will produce great interference to fund managers,and may lead them to adjust portfolios frequently or window dress their portfolios to attract more cash inflows,which will significantly increase capital cost and fund risk.Based on institutional background and theory analysis above,the author choose three kind of opportunistic behaviors: window dressing,gambling,and herding in industries.Combining theoretical and empirical analysis,this thesis thoroughly investigated the opportunistic behavior of open-end equity or mixed mutual funds in China.For the listed three kinds of opportunistic behavior above,in this thesis,the author put forward the following research questions:Regarding on the window dressing behavior,the author mainly answers four research questions: 1.Do managers in China mutual fund market window dress? 2.If they do,what is the driving factors of such a kind of opportunistic behavior? How will investors react to window dressing behavior? 3.How does the window dressing behavior affect a fund's future performance? 4.If window dressing is erodes fund value,what is the effective constraint mechanism?Regarding on the gambling behavior,the author mainly answers four research questions: 1.would a fund manager take part in gambling related activities when the fund underperformed in the first half of the year? 2.What is the driving factors that is related to fund gambling behavior? How would fund characters and market conditions affect fund a manger's gambling propensity? 3.What is the effective constraint mechanism for mutual funds' gambling incentive? 4.How would the gambling behavior affect fund performance? Regarding on the industry herding,regarding the window dressing behavior,the author mainly answers four research questions: 1.Do mutual funds in China exhibit industry herding,buy herding or sell herding? 2.If so,what is the driving forces to such a kind of behavior? How would industry characteristics,fund flow or market conditions affect funds herding in industries? 3.What effect does industry herding behavior on the stock market? Would funds herding in industries destabilize industry value?The main conclusions of research are as follows:Firstly,this thesis finds that fund managers who having low skills and achieving poor performance in the first 5 month of each half-year are more likely to window-dress.Window dressing is negatively related to future fund performance,both short-term and long-term performance.Evidence in this thesis indicates that a fund's performance during the delay period helps invesotrs resolve the potential conflict between the signals,if the performance is good,then investors are more likely to attribute this conflict to stock selection and reward the fund with higher incremental flows,but If the performance is bad,the investors seems not to punish these Window-dressing funds.When institutional investors holding of fund shares will diminish funds window dressing behavior,this can be attribute to the positive sensibility of performance-cash flow-in of institutional investors.Secondly,mutual fund managers of mid-year under-performing mutual funds exhibit significantly stronger gambling incentives and tend to increase the skewness of fund returns in the second half of the year.Results in this thesis also suggest that old funds,funds with more volatile returns,or smaller scale,or higher expense ratio are more likely to increase fund return skewness when they have under-performed in the first half of the year.Fund managers propensity to gamble is stronger during bull market and stronger in bear market.Managers manipulate fund return skewness by adjusting fund portfolio weights allocated to stocks with high expected(ex ante)coskewness and idiosyncratic skewness.Finally,the gambling-related skewness-adjusting behavior of fund managers erodes fund values in the long-run and has significant negative effect on future performance,even though such kind of behavior indeed improve fund performance in the second half of the year.Thirdly,this thesis document that mutual funds in China herd in industries using LSV(1992)herding measure and Wermers(1995)buy and sell herding measures.Even if we look into herding behavior in different industries or different time period,conclusion above also holds.This thesis also find evidence indicating that the buy herding in industries by mutual funds is related to the industry characters such and market condition.The buy herding behavior in industries with lower past six-month accumulative returns,or lower volatile returns,or lower turnover ratio are more sever.In addition,the industries that are bought by herding mutual funds outperform industries that are sold by herding mutual funds in the period when herding takes place,and there is no evidence of return reversal of these portfolios,which means that mutual herding has no destabilizing effect on industry values.Based on the above research conclusions,this thesis then provide policy suggestions from the perspective of regulators,fund management companies and investors,key points of these suggestions are as follows:The regulators should strengthen external supervision on mutual fund industry,perfect domestic fund manager market,and establish and improve the reputation incentive mechanism of the fund industry.From the perspective of fund management companies,they should strengthen internal management,improve the manager compensation system,establish and perfect the decision mechanism of venture investment;from the point of view from investors,they should be encouraged to set up proper investment philosophy and increasing investment skills.Compared with previous study,this thesis introduce tow measures of window dressing,BHRG and Rank Gap,measure mutual fund managers' gambling behavior using fund return skewness adjustment and portfolio weights change of stocks with high ex ante coskewness and idioskewness,and apply LSV(1992)'s herding measure into industry level to describe funds' herding behavior on industries.This thesis study fund managers' opportunistic behavior from two aspects: one is individual level,and the other is group level.The main contribution and innovation are as follow:Firstly,this thesis enriches and perfect the literature on fund competition.Conclusions made in this strand of studies mainly use data of U.S.funds.However,the development path and institutional background of mutual fund industry in China are entirely different from that in U.S.mutual funds in U.S are usually organized as companies,investors can vote director board member including independent directors,the director board would be authorized to select fund managers.But in China,mutual funds are all contracted funds,investors send their money to fund management companies,but have no right to select director board of fund management companies.What's more,one fund management company may manage multiple funds.Thus the conclusions drawn using U.S data may be not applicable to China market,which makes researches on China's mutual fund industry in this thesis more meaningful.Secondly,this thesis enriches and perfects domestic researches on fund performance.Most of such researches focus on the driving factors of fund performance,the valuation system on mutual funds,valuation on fund managers' behavior,as well as influence of fund performance on fund flows.However,studies on the effect of fund performance on fund managers' behavior is rare.Studies in this thesis widen this strand of literature into performance of fund on fund managers' window dressing and gambling behavior.Thirdly,this thesis enriches research on investors gambling behavior,current domestic research in this area mainly focus on equity market and warrant market and investigate skewness preference of investors,but studies on existence of skewness preference or gambling propensity of mutual fund managers is rare,so is the studies about behind driving factors of the skewness preference.The study on fund managers gambling behavior under the performance pressure fills in the gaps and makes up for weakness in this field.Fourthly,this thesis enriches research on mutual fund managers' risk-taking behavior?The sample used in this these covers all equity mutual funds and mixed mutual funds which invest mainly on equities in China,thus avoids the problem of selection bias in previous studies using China mutual fund data.In addition,most of existing domestic study on fund managers' risk-taking behavior use standard deviation of fund return as proxy for risk,very few research's use gambling measure or other three-moment measures of fund returns as risk-taking measure.In this thesis,the author put fund managers' gambling under the framework of risk-taking behavior,and empirically study the influence of mid-term performance pressure on mutual fund managers' gambling propensity,as well as how the gambling of mutual fund manager affect mutual funds' performance.Finally,this thesis widens the study angle on herding behavior,current domestic researches are mainly about herding behaviors on individual stock level,on different sections,and on funds with same investment style.However,there has been little studies of herding behavior on industries,and most of them focus on how to measure herding behavior,research in this thesis extended to the factors that influence mutual funds' herding in industries,the economic consequence and industry effect of this kind of behavior.