The Flow-Performance Relationship of Chinese Equity Mutual Funds: Net Flows, Inflows, and Outflows

This paper investigates the flow–performance relationship of Chinese equity mutual funds, and is the first attempt to analyze their cash flows. The empirical findings are summarized as follows. First, prior performance has a positive effect on subsequent cash flows. Second, flow outliers in 2007 seem to blur the flow–performance relationship. Third, during the stable period from 2008 Q1 to 2012 Q4, convexity is observed for the net flow–performance relationship due to the inflow–performance relationship. Fourth, the disposition effect is corroborated by the results of the portfolio approach, piecewise linear regression and SVAR model. Fifth, variance decomposition analysis shows that market return shock explains the forecasted error variance of cash flows to a large extent. Finally, while both inflows and outflows respond positively to market return shock over time, the response of inflows is stronger than that of outflows.