CSI300 Index Additions And Mutual Funds' Trading

Most of the researches on the stock index effect at home and abroad focus on the various influences on the stocks,but the researches on the influence of stock index effect on professional investors such as mutual funds are still relatively few.The index additions not only convey to the market the status of "industry leaders" of the added stocks,the sign of improved management quality of the added stocks,and the information of future prospect or investment value of the added stocks,but also attract the attention of mass media,analysts and investors.As fund managers have limited attention and search cost,they should reasonably buy these winner stocks with the motivation to cater to the stock index effect and become net buyers of the added stocks.Based on the information content hypothesis of stock index effect,The paper exploits a quasi-natural experiment created by the CSI300 Index additions in Chinese capital market,and examines the impact of the CSI300 Index additions on the trading and performance of mutual funds.The results estimated by the Difference-in-Differences method show that,compared to backup stocks,after the adjustment of the CSI300 Index,the funds' net purchases of the stocks newly included in CSI300 Index have increased significantly by 24.59%.In the cross-sectional differences tests,the results show that funds with lower industry concentration?shareholding concentration and shareholding transparency will be more affected.To further ensure the robustness of the results,this paper also conducts a series of robustness tests,including examining the reliability of exogenous shocks,excluding the alternative explanation of flowcatering hypothesis,and testing the economic consequences.The analysis of the economic consequences of the adjustment of CSI300 Index shows that funds with a strong propensity to buy stocks newly included in CSI300 Index outperform funds with a weak propensity,however,this superior investment performance persistence does not exist in the next half year,which is consistent with the "Hot Hands Effect" of funds' performance.By using the CSI300 index adjustment system of China as an exogenous shock,this paper not only provides empirical evidences for studying the impact of stock price index additions on mutual funds' trading & performance,but also provides reference for regulatory authorities to improve the CSI300 index adjustment system and for portfolio managers and investors to make decisions in the capital market.