Eastern European Business and Economics Journal

Does Survivorship Bias of Mutual Funds Differ Between Liquidations and Mergers?

 

 

Hung-Cheng Lai, Kuan-Min Wang

 

Lai H. C., Wang K. M. 2016. Does Survivorship Bias of Mutual Funds Differ Between Liquidations and Mergers? Eastern European Business and Economics Journal 2(4): 299 - 314.

 

Full text

 

Reviewers:

 

Liping GAO, The University of Texas at el Paso, USA;

Jan HAUKE, Adam Mickiewicz University, Poland;

Olena SOKOLOVSKA, Institute of Industrial Economics of National Academy of Sciences of Ukraine, Ukraine.

 

Abstract:

The performance of mutual funds may be misleading due to survivorship bias if the fund family tends to liquidate or merge funds. This paper suggests that funds subject to liquidations and mergers may differ in nature; therefore, this study distinguishes between the two activities. This paper examines whether survivorship bias differs according to whether a fund is liquidated or merged and explores the consequent implications. The empirical results show that Taiwanese equity funds have a survivorship bias of 1.056% annually. After eliminating the merged funds from the sample, we find that fund liquidation is related to performance. This indicates that the factors determining the liquidation and merger of mutual funds have significantly different impacts on the survivorship bias of these funds.

 

Keywords:

mutual fund; survivorship bias; liquidation; merger

 

JEL classification:

G11, G12

 

Language:

English

 

References:

Aggarwal, R. K., & Jorion, P. (2010). Hidden survivorship in hedge fund returns. Financial Analysts Journal, 66, 69–74.

Ball, R., & Watts, R. (1979). Some additional evidence on survival biases. The Journal of Finance, 34, 1802–1808.

Baquero, G., Horst, J. T., & Verbeek, M. (2005). Survival, look-ahead bias and the persistence in hedge fund performance. Journal of Financial and Quantitative Analysis, 40, 493–518.

Brown, S. J., Goetzmann, W. N., Ibbotson, R. G., & Ross, S. A. (1992). Survivorship bias in performance studies. The Review of Financial Studies, 5, 553–580.

Brown, S. J., Goetzmann, W. N., Ibbotson, R. G., & Ross, S. A. (1997). The J-shape of performance persistence given survivorship bias. The Review of Economics and Statistics, 79, 167–170.

Brown, S., Goetzmann, W. N., & Ibbotson, R. G. (1999). Offshore hedge funds: survival and performance, 1989–1995. Journal of Business, 72, 91–117.

Carhart, M. (1997). On persistence in mutual fund performance. The Journal of Finance, 52, 57–82.

Carhart, M., Carpenter, J. N., Lynch, A. W., & Musto, D. K. (2002). Mutual fund survivorship, The Review of Financial Studies, 15, 1439–1463.

Carpenter, J., & Lynch, A. (1999). Survivorship bias and attrition effects in measures of performance persistence. Journal of Financial Economics, 54, 337–374.

Elton, E. J., Gruber, M. J., & Blake, C. R. (1996). Survivorship bias and mutual fund performance. The Review of Financial Studies, 9, 1097–1120.

Elton, E. J., Gruber, M. J., & Blake, C. R. (2001). A first look at the accuracy of the CRSP mmutual fund database and a comparison of the CRSP and morningstar mmutual fund databases. The Journal of Finance, 56, 2415–2430.

Ferruz, l., Ortiz, C., & Vicente, L. (2008). Money market fund investors’ response to fund company mergers. Applied Financial Economics Letters, 4, 109–113.

Filip, D., (2014). Survivorship Bias and Performance  of Mutual Funds in Hungary. Periodica Polytechnica Social and Management Sciences, 22(1), 47-56.

Grinblatt, M., & Titman, S. (1989). Mutual fund performance: An analysis of quarterly portfolio holdings. The Journal of Business, 62, 393–416.

Grinblatt, M., & Titman, S. (1992). Performance persistence in mutual funds. The Journal of Finance, 47, 1977–1984.

Gruber, M. J. (1996). Another puzzle: The growth in actively managed mutual funds. The Journal of Finance, 51, 783–810.

Hallahan, T. A., & Faff, R. W. (2001). Induced persistence or reversals in fund performance? The Effect of Survivorship Bias. Applied Financial Economics, 11, 119–126.

Hendricks, D., Patel, J., & Zeckhauser, R. (1997). The J-shape of performance persistence given survivorship bias. The Review of Economics and Statistics, 79, 161–166.

Liang, B. (2000). Hedge funds: The living and the dead. The Journal of Financial and Quantitative Analysis, 35, 309–326.

 Linnainmaa, J. T. (2013). Reverse survivorship bias. Journal of Finance, 68,789–813.

Malkiel, B. G. (1995). Returns from investing in equity mutual funds 1971 to 1991. The Journal of Finance, 50, 549–572.

Otten, R., & Bams, D. (2004). How to measure mutual fund performance: Economic versus statistical relevance. Accounting and Finance, 44, 203–222.

Rohleder, M., Scholz, H. & Wilkens, M. (2011). Survivorship bias and mutual fund performance: Relevance, significance, and methodical differences. Review of Finance, 15, 441–474.

Zhao, X. (2005). Exit decisions in the U.S. mutual fund industry. The Journal of Business, 78, 1365–1401.

Zheng, L. (1999). Is Money smart? A study of mutual fund investors’ fund selection ability. The Journal of Finance, 54, 901–933.