Overselling winners and losers: How mutual fund managers' trading behavior affects asset prices

We link a seemingly biased trading behavior to equilibrium asset prices. U.S. equity mutual fund managers tend to sell both their big winners and big losers. This selling pressure pushes down current prices and leads to higher future returns; aggregating across funds, we find that securities for which investors have large unrealized gains and losses outperform in the subsequent month. Funds with larger turnover, shorter holding period, and higher expense ratios, are significantly more likely to manifest this trading pattern, and unrealized profits from such funds have stronger return predictability. This cross-sectional return predictability is difficult to reconcile with alternative explanations. •Mutual fund managers are more likely to sell holdings with large unrealized gains and losses .•We explicitly link this behavior to price fluctuations by constructing stock-level variables to capture this selling pressure.•We pin down this link between selling behavior and price impact by exploring the heterogeneity across fund characteristics.