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Mutual funds’ selective participation and subsequent performance of seasoned equity offerings

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Abstract

We study the stock-picking ability of the mutual fund industry in China based on its selective participation in the SEO market. Mutual funds, as an industry, have selection ability if SEO firms with more subscriptions by mutual funds have better future performance than those with fewer subscriptions. To isolate the effect of mutual funds’ favorable opinions about the future performance of an SEO firm, we use a statistical model to exclude the impact of a set of extensive factors on the decision to subscribe to an SEO. We use the model residuals as the ex ante favorable expectations about SEO firms by the mutual fund industry. Our findings suggest that those SEO firms being favored by the mutual fund industry perform statistically and economically significantly better than those SEO firms not favored by the industry. Investors can draw valuable inferences from mutual funds’ aggregate decision to participate in the SEO offer market.

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Notes

  1. In addition to participating in SEO subscription, these mutual funds would purchase proportionately more shares of the successful SEOs. However, such data are not available. We sincerely thank an anonymous reviewer to raise this point.

  2. We acknowledge the reviewer for raising this point.

  3. We thank the reviewer for helping us clarify its definition.

  4. We also use the weighted number of mutual funds, where the weight is computed as the ratio of a fund’s SEO purchase over its total assets, the results are quantitatively the same.

  5. When we include other variables on SEO firms, such as board size, independent directors ratio, the separation of Chair and CEO, the variance of the firm’s return using the last 200 days, a firm’s turnover during the prior year, analyst coverage during the prior year, the main results in this study remain qualitatively the same.

  6. We greatly acknowledge an anonymous referee for his valuable suggestion.

  7. Using alternative thresholds, such as 5%, 10%, 20%, do not change our results.

  8. A fixed income mutual fund invests at least 80% of their assets in fixed income securities, whereas a balance mutual fund has flexibility to invest in any stocks and fixed income securities.

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Acknowledgements

Feng acknowledges the financial support from the National Natural Science Foundation of China (Grant No. 71672147). The usual caveats apply.

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Authors and Affiliations

  1. Shanghai University of Finance and Economics, Shanghai, China

    Xunan Feng

  2. Gordon Ford College of Business, Western Kentucky University, Bowling Green, KY, 42101, USA

    Kam C. Chan

Authors
  1. Xunan Feng
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  2. Kam C. Chan
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Corresponding author

Correspondence to Kam C. Chan.

Appendices

Appendix 1

See Table 7.

Table 7 Mutual fund industry in China
Full size table

Appendix 2

See Table 8.

Table 8 Variable definitions
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Appendix 3

See Table 9.

Table 9 Analysis of SEO long-run stock performance with a time trend
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Feng, X., Chan, K.C. Mutual funds’ selective participation and subsequent performance of seasoned equity offerings. Empir Econ 56, 1797–1822 (2019). https://doi.org/10.1007/s00181-018-1420-0

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