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RFS Advance Access originally published online on June 22, 2006
Review of Financial Studies 2007 20(1):125-150; doi:10.1093/rfs/hhl008
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.

Does Motivation Matter When Assessing Trade Performance? An Analysis of Mutual Funds

Gordon J. Alexander
University of Minnesota

Gjergji Cici and Scott Gibson
College of William & Mary

Address correspondence to Scott Gibson, School of Business, College of William & Mary, Williamsburg, VA 23187, or email: gibson{at}mason.wm.edu.

We relate the performance of mutual fund trades to their motivation. A fund manager who buys stocks when there are heavy investor outflows is likely to be motivated by the belief that the stocks are significantly undervalued. In contrast, when there are heavy inflows, the manager is likely to be motivated to work off excess liquidity by buying stocks. Our analysis reveals that managers making purely valuation-motivated purchases substantially beat the market but are unable to do so when compelled to invest excess cash from investor inflows. A similar, but weaker, pattern is found for stocks that are sold. (JEL G11, G29)


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