Hostname: page-component-78c5997874-8bhkd Total loading time: 0 Render date: 2024-11-15T18:45:56.352Z Has data issue: false hasContentIssue false
  • English
  • Français

Investing in Low-Trust Countries: On the Role of Social Trust in the Global Mutual Fund Industry

Published online by Cambridge University Press:  26 November 2020

Massimo Massa ,
Chengwei Wang ,
Hong Zhang  and
Jian Zhang
Massimo Massa
Affiliation:
INSEADmassimo.massa@insead.edu
Chengwei Wang
Affiliation:
Sungkyunkwan University SKK Graduate School of Businesswangchw@skku.edu
Hong Zhang*
Affiliation:
Tsinghua University PBC School of Finance
Jian Zhang
Affiliation:
The University of Hong Kong Faculty of Business and Economicszhangj1@hku.hk
*
zhangh@pbcsf.tsinghua.edu.cn (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

We hypothesize that social trust, in mitigating contracting incompleteness, may have an important effect on the activeness and effectiveness of delegated portfolio management. Using a complete sample of worldwide open-end mutual funds, we find that trust is positively associated with the activeness of funds and that trust-related active share delivers superior performance (e.g., approximately 2% per year for cross-border investments). Moreover, “trust in the market” and “trust in managers” play important yet different roles for different types of cross-border delegated portfolio management. Our results suggest that trust acts as a fundamental building block for delegated portfolio management.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 1 , February 2022 , pp. 240 - 290
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Jennifer Conrad (the editor) and Danling Jiang (the referee) for their insightful comments. We also thank Douglas Breeden, Henry Cao, Hui Chen, Bernard Dumas, Philip Dybvig, Robert Engle, Paul Gao, Mariassunta Giannetti, Zhiguo He, Pierre Hillion, Soren Hivkiar, Jennifer Huang, Marcin Kacperczyk, Albert (Pete) Kyle, Bing Liang, Dong Lou, Ronald Masulis, David Ng, Marco Pagano, Stavros Panageas, Lubos Pastor, Neil Pearson, Joel Peress, David Reeb, Clemens Sialm, Stephan Siegel, Mathew Spiegel, Laura Starks, Philip Strahan, Lu Zheng, and participants at the 2016 American Finance Annual Meeting, the Asian Finance Association Annual Meeting, the China International Conference in Finance, and the Summer Institute of Finance Conference. We thank the Asian Finance Association’s program committee for awarding us the Best Paper in Banking and Financial Institutions. Hong Zhang acknowledges support from the Emerging Market Institute of INSEAD, the Phoenix Healthcare Finance Center of PBC School of Finance, and the National Natural Science Foundation of China, grant #71790591.

References

Acemoglu, D., and Johnson, S.. “Unbundling Institutions.” Journal of Political Economy, 113 (2005), 949–995.CrossRefGoogle Scholar
Aggarwal, R.; Erel, I.; Stulz, R.; and Williamson, R.. “Differences in Governance Practices Between U.S. and Foreign Firms: Measurement, Causes, and Consequences.” Review of Financial Studies, 23 (2009), 3131–3169.CrossRefGoogle Scholar
Agarwal, V.; Gay, G. D.; and Ling, L.. “Window Dressing in Mutual Funds.” Review of Financial Studies, 27 (2014), 3133–3170.CrossRefGoogle Scholar
Ahern, K.; Daminelli, D.; and Fracassi, C.. “Lost in Translation? The Effect of Cultural Values on Mergers Around the World.” Journal of Financial Economics, 117 (2015), 165–189.CrossRefGoogle Scholar
Algan, Y., and Cahuc, P.. “Trust, Growth and Well-Being: New Evidence and Policy Implication.” Handbook of Economic Growth, 2 (2014), 49–120.CrossRefGoogle Scholar
Antweiler, W., and Frank, M.. “Is All That Talk Just Noise? The Information Content of Internet Stock Message Boards.” Journal of Finance, 59 (2004), 1259–1294.CrossRefGoogle Scholar
Arrow, K. “Gifts and Exchanges.” Philosophy and Public Affairs, 1 (1972), 343–362.Google Scholar
Baran, N.; Sapienza, P.; and Zingales, L.. “Can We Infer Social Preferences from the Lab? Evidence from the Trust Game.” NBER Working Paper No. 15654 (2010).CrossRefGoogle Scholar
Bartram, S.; Brown, G.; and Stulz, R.. “Why Are U.S. Stocks More Volatile?” Journal of Finance, 67 (2012), 1329–1370.CrossRefGoogle Scholar
Berg, J.; Dickhaut, J.; and McCabe, K.. “Trust, Reciprocity and Social History.” Games and Economic Behavior, 10 (1995), 122–142.CrossRefGoogle Scholar
Berk, J., and Green, R.. “Mutual Fund Flows and Performance in Rational Markets.” Journal of Political Economy, 112 (2004), 1269–1295.CrossRefGoogle Scholar
Berk, J., and van Binsbergen, J.. “Measuring Skill in the Mutual Fund Industry.” Journal of Financial Economics, 118(2015), 1–20.CrossRefGoogle Scholar
Black, F.; Jensen, M.; and Scholes, M.. “The Capital Asset Pricing Model: Some Empirical Tests.” In Studies in the Theory of Capital Markets, Jensen, M. C., ed. New York: Praeger (1972).Google Scholar
Blankespoor, E.; Miller, G. S.; and White, H. D.. “The Role of Dissemination in Market Liquidity: Evidence from Firms’ Use of Twitter.” Accounting Review, 89 (2013), 79–112.CrossRefGoogle Scholar
Bloom, N.; Sadun, R.; and Reenen, J.. “The Organization of Firms Across Countries.” Quarterly Journal of Economics, 127 (2012), 1663–1705.CrossRefGoogle Scholar
Bottazzi, L.; Da Rin, M.; and Hellmann, T.. “The Importance of Trust for Investment: Evidence from Venture Capital.” Review of Financial Studies, 29 (2016), 2283–2318.CrossRefGoogle Scholar
Bushman, R.; Piotroski, J.; and Smith, A.. “What Determines Corporate Transparency?” Journal of Accounting Research, 42 (2004), 207–252.CrossRefGoogle Scholar
Butler, J. V.; Giuliano, P.; and Guiso, L.. “The Right Amount of Trust.” Journal of the European Economic Association, 14 (2016), 1155–1180.CrossRefGoogle Scholar
Carhart, M. M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Carhart, M. M.; Kaniel, R.; Musto, D. K.; and Reed, A.V.. “Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds.” Journal of Finance, 58 (2002), 661–93.CrossRefGoogle Scholar
Chavis, L., and Leslie, P.. “Consumer Boycotts: The Impact of the Iraq War on French Wine Sales in the U.S.” Quantitative Marketing and Economics, 7 (2009), 37–67.CrossRefGoogle Scholar
Chen, H.; De, P.; Hu, Y.; and Hwang, B.. “Wisdom of Crowds: The Value of Stock Opinions Transmitted through Social Media.” Review of Financial Studies, 27(2014), 1367–1403.CrossRefGoogle Scholar
Chen, J.; Hong, H.; Huang, M.; and Kubik, J.. “Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization.” American Economic Review, 94 (2004), 1276–1302.CrossRefGoogle Scholar
Chen, S.; Massa, M.; and Zhang, H.. “The Unexpected Activeness of Passive Investors: A Worldwide Analysis of ETFs.” Review of Asset Pricing Studies, 9 (2019), 296–355.CrossRefGoogle Scholar
Choi, S., and Kahan, M.. “The Market Penalty for Mutual Fund Scandals.” Boston University Law Review, 87 (2007), 1021–1057.Google Scholar
Coval, J., and Moskowitz, T.. “The Geography of Investment: Informed Trading and Asset Prices.” Journal of Political Economy, 109 (2001), 811–841.CrossRefGoogle Scholar
Cremers, M. “Active Share and the Three Pillars of Active Management: Skill, Conviction and Opportunity.” Financial Analysts Journal, 73 (2017), 61–79.CrossRefGoogle Scholar
Cremers, K., and Petajisto, A.. “How Active is Your Fund Manager? A New Measure that Predicts Performance.” Review of Financial Studies, 22 (2009), 3329–3365.CrossRefGoogle Scholar
Cremers, M.; Ferreira, M.; Matos, P.; and Starks, L.. “Indexing and Active Fund Management: International Evidence.” Journal of Financial Economics, 120 (2016), 539–560.CrossRefGoogle Scholar
Davis, J.; Payne, G.; and McMahan, G.. “A Few Bad Apples? Scandalous Behavior of Mutual Fund Managers.” Journal of Business Ethics, 76 (2007), 319–334.CrossRefGoogle Scholar
DeFond, M.; Hung, M.; and Trezevant, R.. “Investor Protection and the Information Content of Annual Earnings Announcements: International Evidence.” Journal of Accounting and Economics, 43 (2007), 37–67.CrossRefGoogle Scholar
Djankov, S.; Porta, R. La; Lopez-de-Silanes, F.; and Shleifer, A.. “The Law and Economics of Self-Dealing.” Journal of Financial Economics, 88 (2008), 403–465.CrossRefGoogle Scholar
Doidge, C.; Karolyi, G.; and Stulz, R.. “Why Are Foreign Firms Listed in the U.S. Worth More?” Journal of Financial Economics, 71 (2004), 205–238.CrossRefGoogle Scholar
Doidge, C.; Karolyi, G.; and Stulz, R.. “Why Do Countries Matter So Much for Corporate Governance?” Journal of Financial Economics, 86 (2007), 1–39.CrossRefGoogle Scholar
Duarte, J.; Siegel, S.; and Young, L.. “Trust and Credit: The Role of Appearance in Peer-To-Peer Lending.” Review of Financial Studies, 25 (2012), 2455–2484.CrossRefGoogle Scholar
Durnev, A.; Errunza, V.; and Molchanov, A.. “Property Rights Protection, Corporate Transparency, and Growth.” Journal of International Business Studies, 40 (2009), 1533–1562.CrossRefGoogle Scholar
Fama, E., and French, K.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427–465.CrossRefGoogle Scholar
Fama, E., and French, K.. “Size, Value, and Momentum in International Stock Returns.” Journal of Financial Economics, 105 (2012), 457–472.CrossRefGoogle Scholar
Fama, E., and Jensen, M.. “Agency Problems and Residual Claims.” Journal of Law and Economics, 26 (1983), 327–349.CrossRefGoogle Scholar
Ferson, W., and Lin, J.. “Alpha and Performance Measurement: The Effects of Investor Disagreement and Heterogeneity.” Journal of Finance, 69 (2014), 1565–1596.CrossRefGoogle Scholar
Frazzini, A., and Lamont, O.. “Dumb Money: Mutual Fund Flows and the Cross-Section of Stock Returns.” Journal of Financial Economics, 88 (2008), 299–322.CrossRefGoogle Scholar
Frazzini, A.; Friedman, J.; and Pomorski, L.. “Deactivating Active Share.” Financial Analysts Journal, 72 (2016), 14–21.CrossRefGoogle Scholar
Fukuyama, F. Trust: Social Virtues and the Creation of Prosperity. New York: Free Press (1995).Google Scholar
Gambetta, D. “Can We Trust Trust?” In Trust: Making and Breaking Cooperative Relations, Gambetta, D., ed. New York, NY: Basil Blackwell (1988), 213–237.Google Scholar
Garcia, D., and Vanden, J.. “Information Acquisition and Mutual Funds.” Journal of Economic Theory, 144 (2009), 1965–1995.CrossRefGoogle Scholar
Gennaioli, N.; Shleifer, A.; and Vishny, R.. “Finance and the Preservation of Wealth.” Quarterly Journal of Economics, 129 (2014), 1221–1254.CrossRefGoogle Scholar
Gennaioli, N.; Shleifer, A.; and Vishny, R.. “Money Doctors.” Journal of Finance, 70 (2015), 91–114.CrossRefGoogle Scholar
Georgarakos, D., and Inderst, R.. “Financial Advice and Stock Market Participation.” Working Paper, European Central Bank (2014).Google Scholar
Glode, V. “Why Mutual Funds ‘Underperform’.” Journal of Financial Economics, 99 (2011), 546–559.CrossRefGoogle Scholar
Griffin, J. “Are the Fama and French Factors Global or Country Specific?” Review of Financial Studies, 15 (2002), 783–803.CrossRefGoogle Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “The Role of Social Capital in Financial Development.” American Economic Review, 94 (2004), 526–556.CrossRefGoogle Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “Trusting the Stock Market.” Journal of Finance, 63 (2008), 2557–2600.CrossRefGoogle Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “Cultural Biases in Economic Exchange?” Quarterly Journal of Economics, 124 (2009), 1095–1131.CrossRefGoogle Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “Corporate Culture, Societal Culture, and Institutions.” American Economic Review, 105 (2015), 336–339.CrossRefGoogle Scholar
Gurun, U.G.; Stoffman, N.; and Yonker, S. E.. “Trust Busting: The Effect of Fraud on Investor Behavior.” Review of Financial Studies, 31 (2018), 1341–1376.CrossRefGoogle Scholar
Helliwell, J., and Putnam, R.. “Education and Social Capital.” Eastern Economics Journal, 33 (2007), 1–19.CrossRefGoogle Scholar
Hortaçsu, A., and Syverson, C.. “Search Costs, Product Differentiation, and Welfare Effects of Entry: A Case Study of SP 500 Index Funds.” Quarterly Journal of Economics, 119 (2004), 403–456.CrossRefGoogle Scholar
Houge, T., and Wellman, J.. “Fallout from the Mutual Fund Trading Scandal.” Journal of Business Ethics, 62 (2005), 129–139.CrossRefGoogle Scholar
Hwang, B. H. “Country-Specific Sentiment and Security Prices.” Journal of Financial Economics, 100 (2011), 382–401.CrossRefGoogle Scholar
Hwang, I. “Which Type of Trust Matters?: Interpersonal vs. Institutional vs. Political Trust.” Working Paper, Bank of Korea (2017).CrossRefGoogle Scholar
Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Jiang, D., and Lim, S. S.. “Trust and Household Debt.” Review of Finance, 22 (2018), 783–812.Google Scholar
Jin, L., and Myers, S.. “R2 Around the World: New Theory and New Tests.” Journal of Financial Economics, 79 (2006), 257–292.CrossRefGoogle Scholar
Karolyi, A. “The Gravity of Culture for Finance.” Journal of Corporate Finance, 41 (2016), 610–625.CrossRefGoogle Scholar
Karolyi, A.; Lee, K.; and van Dijk, M.. “Understanding Commonality in Liquidity around the World.” Journal of Financial Economics, 105 (2012), 82–112.CrossRefGoogle Scholar
Knack, S., and Keefer, P.. “Does Social Capital Have an Economic Payoff? A Cross-Country Investigation.” Quarterly Journal of Economics, 112 (1997), 1251–1288.CrossRefGoogle Scholar
Kostovetsky, L. “Whom Do You Trust?: Investor-Advisor Relationships and Mutual Fund Flows.” Review of Financial Studies, 29 (2015), 898–936.CrossRefGoogle Scholar
Lakonishok, J.; Shleifer, A.; Thaler, R.; and Vishny, R.. “Window Dressing by Pension Fund Managers.” American Economic Review, 81 (1991), 227–31.Google Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R.. “Trust in Large Organization.” American Economic Review Papers and Proceedings, 87 (1997), 333–338.Google Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R.. “The Quality of Government.” Journal of Law, Economics and Organization, 15 (1999), 222–279.CrossRefGoogle Scholar
Lettau, M., and Ludvigson, S.. “Resurrecting the (C) CAPM: A Cross-Sectional Test When Risk Premia are Time-Varying.” Journal of Political Economy, 109 (2001), 1238–1287.CrossRefGoogle Scholar
Li, J.; Massa, M.; and Zhang, H.. “Culture vs. Bias: Can Social Trust Mitigate the Disposition Effect?” Working Paper, INSEAD (2017).CrossRefGoogle Scholar
Lin, C.; Massa, M.; and Zhang, H.. “Mutual Funds and Information Diffusion: The Role of Country-Level Governance.” Review of Financial Studies, 27 (2014), 3343–3387.CrossRefGoogle Scholar
Mamaysky, H.; Spiegel, M.; and Zhang, H.. “Estimating the Dynamics of Mutual Fund Alphas and Betas.” Review of Financial Studies, 21 (2008), 233–264.CrossRefGoogle Scholar
Michaels, G., and Zhi, X.. “Freedom Fries.” American Economic Journal: Applied Economics, 2 (2010), 256–281.Google Scholar
Miller, G. S., and Skinner, D. J.. “The Evolving Disclosure Landscape: How Changes in Technology, the Media, and Capital Markets are Affecting Disclosure.” Journal of Accounting Research, 53 (2015), 221–239.CrossRefGoogle Scholar
Morck, R.; Yeung, B.; and Yu, W.. “The Information Content of Stock Markets: Why Do Emerging Markets Have Synchronous Stock Price Movements?” Journal of Financial Economics, 58 (2000), 215–260.CrossRefGoogle Scholar
Myers, S., and Majluf, N.. “Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have.” Journal of Financial Economics, 13 (1984), 187–221.CrossRefGoogle Scholar
North, D. C. “Institutions.” Journal of Economic Perspectives, 5 (1991), 97–112.CrossRefGoogle Scholar
Pastor, L., and Stambaugh, R.. “On the Size of the Active Management Industry.” Journal of Political Economy, 120 (2012), 740–781.CrossRefGoogle Scholar
Pastor, L.; Stambaugh, R. F.; and Taylor, L.. “Scale and Skill in Active Management.” Journal of Financial Economics, 116 (2015), 23–45.CrossRefGoogle Scholar
Pevzner, M.; Xie, F.; and Xin, X.. “When Firms Talk, Do Investors Listen? The Role of Trust in Stock Market Reactions to Corporate Earnings Announcements.” Journal of Financial Economics, 117 (2015), 190–223.CrossRefGoogle Scholar
Putnam, R.; Leonardi, R.; and Nanetti, R.. Making Democracy Work: Civic Traditions in Modern Italy. New Jersey: Princeton University Press (1993).Google Scholar
Sarkissian, S., and Schill, M.. “The Overseas Listing Decision: New Evidence of Proximity Preference.” Review of Financial Studies, 17 (2004), 769–809.CrossRefGoogle Scholar
Sias, R. W., and Starks, L. T.. “Institutions and Individuals at the Turn-of-the-Year.” Journal of Finance, 52 (1997), 1543–1562.CrossRefGoogle Scholar
Stack, S., and Kposowa, A.. “The Effect of Religiosity on Tax Fraud Acceptability: A Cross-National Analysis.” Journal for the Scientific Study of Religion, 45 (2006), 325–351.CrossRefGoogle Scholar
Stein, J. “Why Are Most Funds Open-End? Competition and the Limits to Arbitrage.” Quarterly Journal of Economics, 120 (2005), 247–272.Google Scholar
Whittle, P. Risk-Sensitive Optimal Control. New York: John Wiley and Sons (1990).Google Scholar
Williamson, O. “Calculativeness, Trust, and Economic Organization.” Journal of Law and Economics, 36 (1993), 453–486.CrossRefGoogle Scholar
Wurgler, J. “Financial Markets and the Allocation of Capital.” Journal of Financial Economics, 58 (2000), 187–214.CrossRefGoogle Scholar
Supplementary material: PDF

Massa et al. supplementary material

Massa et al. supplementary material

Download Massa et al. supplementary material(PDF)
PDF 3 MB