Essays in behavioral finance and investments

This thesis studies the behavior of mutual fund managers. I explore the determinants of mutual fund performance heterogeneity, the drivers of their investment decisions with consequences for asset returns, and how they communicate with their investors. \n \nChapter 2 studies the relationship between U.S. mutual funds' common holdings and fund performance. In a network where funds are connected through portfolio overlap, degree centrality of each fund represents the level of similarity with peers. The results show that holdings similarity leads to lower abnormal fund returns. Further tests suggest that information asymmetry is a potential explanation for this relationship. The negative association between holdings similarity and fund performance widens in volatile markets. In uncertain times, mutual funds move towards their benchmark due to asset management constraints. This creates negative price pressure on commonly held assets. A portfolio based on stocks owned by low vs. high degree centrality funds yields abnormal returns of 7% per year. This chapter provides new evidence of the informational advantage hypothesis as a driver of fund performance. It also highlights negative externalities of asset management contracts. \n \nIn chapter 3, jointly with Dr. Constantinos Antoniou, we examine whether mutual fund managers invest more heavily in firms in which they have previously experienced higher returns. Using data from actively managed U.S. equity mutual funds, we find results that support this hypothesis. Experienced returns affect how managers rebalance their portfolios in response to flows, and influence investments at the style level. Experienced returns do not affect the investments of index-tracking funds. Experienced returns, when aggregated at the fund level across stocks, predict more aggressive trading behavior and lower fund returns, and when aggregated across managers at the stock level, predict lower stock returns. \n \nFinally, chapter 4 measures the extent of economic policy uncertainty language in mutual fund communication and its effects on flows. I test the hypothesis that mutual funds communicating more about uncertainty do so to obfuscate financially relevant information. I find that the U.S. active mutual funds that use more words related to economic policy uncertainty tend to be risky and poorly performing funds. The use of uncertain economic terms has a positive effect on fund flows. The effect is stronger for retail funds and in expansion periods. Initial fees become less salient when funds communicate more about economic uncertainty. The evidence presented in this chapter suggest that mutual fund communication matters for fund flows.