Stockholm School of Economics Asia Working Paper Series,
Stockholm School of Economics, Stockholm China Economic Research Institute

Abstract: This study examines the stock-picking ability of mutual funds in China using evidence from the IPO market. We hypothesize that the decision to invest in the IPO market contains positive information about a fund’s underlying expectation of newly listed firms’ future prospects. Using residuals from a model on the determinants of mutual funds purchases in the IPO market as proxy for consensus expectations, we find that IPO firms with high residual funds have significantly better stock returns and operating performance than those with low residual funds. In other words, residual funds can predict IPO future performance. This result is also robust to different specifications and alternative explanations such as mutual fund preferences or monitoring effects.

Keywords: Mutual funds; Stock picking ability; IPO; China

JEL-codes: G15; G23; G30; L25

66 pages, September 12, 2014

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