Xunan Feng, Jin Xu, Ying Wang and Chunyan Tang
Using the sample between 2005 and 2011, the purpose of this paper is to investigate the effect of a new fund entry on incumbents using the overlap measure in portfolio holdings.
Abstract
Purpose
Using the sample between 2005 and 2011, the purpose of this paper is to investigate the effect of a new fund entry on incumbents using the overlap measure in portfolio holdings.
Design/methodology/approach
Empirical methodology is used in this study.
Findings
The authors find that incumbents that have a higher overlap with the entrants underperform subsequently. Based on the characteristic-based approach of Daniel et al. (1997), the authors find that the characteristic selectivity component is negatively correlated with the overlap measure, and thereby the decline in performance is driven by the stock-picking ability. The authors also discuss the unobserved actions of incumbents using the approach proposed by Kacperczyk et al. (2008) and find that incumbent unobserved actions do not benefit mutual fund investors in China. Finally the authors find that investors respond to the supply-side competition between entrants and incumbents quickly. These findings help us understand the mutual fund completion in China.
Originality/value
The findings in this study can help scholars, industry experts and regulatory authorities to understand the effect of competition in Chinese mutual fund industry.
Details
Keywords
Xunan Feng and Na Hu
Based on the theory of limited attention, the purpose of this paper is to investigate whether the investor behavior is influenced by attention, using the sample from earning…
Abstract
Purpose
Based on the theory of limited attention, the purpose of this paper is to investigate whether the investor behavior is influenced by attention, using the sample from earning announcement in China.
Design/methodology/approach
Empirical research using the earning announcement data in China. Specifically, the authors use the sample from 2005 to 2010 in listed A-share firms with earning announcements in Shanghai and Shenzhen stock market. Panel data regressions are used with Newey and West (1987) to correct for the potential heteroskedasticity and autocorrelation. The empirical results strongly support the hypothesis that limited attention impact investor behavior in China.
Findings
The authors find that the immediate price and volume reaction to earning surprise is much weaker and post-announcement drift is much stronger when a greater number of firms make earning announcements on the same day. The authors explain these findings mainly from behavioral bias. When investors process multiple information signals immediately or perform multiple objects simultaneously, their attention will be allocated selectively due to cognitive constraints. Such limited attention causes severe underreaction to immediate earnings announcement, therefore leads to mispricing abnormal related to public accounting information. In the long-run, the market adjusted and there is post-announcement drift.
Research limitations/implications
Consistent with Hirshleifer et al. (2009), the findings in this study indicate that individual investors’ behaviors are influenced by their limited attention in China. The results are different from Yu and Wang (2010) conclusions that same-day concentrated announcement help investors and facilitate information dissemination in China. The findings are explained by the investor distraction hypothesis proposed by Hirshleifer et al. (2009) that investor distraction causes market underreaction.
Practical implications
The arrival of simultaneously extraneous earning information cause market prices and trading volume to react slowly to the relevant news about a firm because competing information signals distract investor from a given firm, causing market price to underreact to relevant news. These finding help us understand investor behavior and the impact of limited attention on security market.
Social implications
Investor limited attention not only affects their stock-buying behavior, but also has an important impact on the efficiency of security market. Specifically, limited attention drive immediate underreaction to earning announcement and the post-earning announcement drift, especially when a greater number of same-day earning announcements are made by other firms.
Originality/value
Limited attention affects security market in China.