Johnson looks at the behavior of mutual fund investors to determine whether shareholders who have held the shares for longer behave differently than new shareholders. He finds that there are differences in behavior. Specifically he finds little relation between fund performace and selling behavior of existing shareholders.
From the paper:
"The main premise of the paper is that transactions from shareholders who monitor the fund's manager are correlated with returns. The first stage of the analysis compares buys with sells to see whether shareholders sell poor returns with the same vigilance they buy good returns."Like virtually everyone who has looked at it, the author finds that net inflows increase after periods (even very short periods) of good returns. What sets this paper apart is that the data set allows Johnson to decompose these cash flows into buys and sells.
He finds that "buys" come from both new and existing shareholders with new shareholders investing more in dollar terms but existing shareholders involved in more transactions (and yes he does control for automatic investments). This difference is consistent with diversification theory.
"Sells," however, do not appear to be as closely tied to performance. Thus positive net inflows following good performance appear to be driven by increased inflows and not decreased outflows.
Again in the author's words:
"In a manner consistent with positive-feedback trading, they buy more after periods of high fund returns but less after periods the fund underperforms its benchmark index. Old shareholders generate the majority of the buy transactions|even after excluding automatic transactions and fund distributions, but new shareholders are responsible for the majority of the fund's inflow."That deserves a WOW! Great paper! A definite I^3 paper!
"Outflow is remarkably constant across all levels of fund returns: shareholders neither increase their sells during periods of poor returns nor decrease their sells during periods of good returns. These results suggest that the risk of losing assets from old shareholders does not incentivize the fund manager to work hard."
Johnson, Woodrow T., "Who Monitors the Mutual Fund Manager, New or Old Shareholders?" (April 28, 2005). http://ssrn.com/abstract=712825
One comment: While I loved the paper as it now is, there may be much more to it than appears at face value.
If we are to simplify the conclusion down to its bare essence we get that existing (old) shareholders are not as good of monitors as new shareholders. The application of this idea to corporate finance could be HUGE.
For instance, do longer tenured shareholders lead to different forms (or levels) of executive pay? Different capital structure? Other agency costs problems? And if so, do corporate governance infrastructures vary with the tenure of shareholders?
So many questions, so little time.
Again be sure to read the Johnson paper!