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Investing in Low-Trust Countries: On the Role of Social Trust in the Global Mutual Fund Industry

Published online by Cambridge University Press:  26 November 2020

Massimo Massa ,
Chengwei Wang ,
Hong Zhang  and
Jian Zhang
Massimo Massa
Affiliation:
INSEADmassimo.massa@insead.edu
Chengwei Wang
Affiliation:
Sungkyunkwan University SKK Graduate School of Businesswangchw@skku.edu
Hong Zhang*
Affiliation:
Tsinghua University PBC School of Finance
Jian Zhang
Affiliation:
The University of Hong Kong Faculty of Business and Economicszhangj1@hku.hk
*
zhangh@pbcsf.tsinghua.edu.cn (corresponding author)
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Abstract

We hypothesize that social trust, in mitigating contracting incompleteness, may have an important effect on the activeness and effectiveness of delegated portfolio management. Using a complete sample of worldwide open-end mutual funds, we find that trust is positively associated with the activeness of funds and that trust-related active share delivers superior performance (e.g., approximately 2% per year for cross-border investments). Moreover, “trust in the market” and “trust in managers” play important yet different roles for different types of cross-border delegated portfolio management. Our results suggest that trust acts as a fundamental building block for delegated portfolio management.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 1 , February 2022 , pp. 240 - 290
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank Jennifer Conrad (the editor) and Danling Jiang (the referee) for their insightful comments. We also thank Douglas Breeden, Henry Cao, Hui Chen, Bernard Dumas, Philip Dybvig, Robert Engle, Paul Gao, Mariassunta Giannetti, Zhiguo He, Pierre Hillion, Soren Hivkiar, Jennifer Huang, Marcin Kacperczyk, Albert (Pete) Kyle, Bing Liang, Dong Lou, Ronald Masulis, David Ng, Marco Pagano, Stavros Panageas, Lubos Pastor, Neil Pearson, Joel Peress, David Reeb, Clemens Sialm, Stephan Siegel, Mathew Spiegel, Laura Starks, Philip Strahan, Lu Zheng, and participants at the 2016 American Finance Annual Meeting, the Asian Finance Association Annual Meeting, the China International Conference in Finance, and the Summer Institute of Finance Conference. We thank the Asian Finance Association’s program committee for awarding us the Best Paper in Banking and Financial Institutions. Hong Zhang acknowledges support from the Emerging Market Institute of INSEAD, the Phoenix Healthcare Finance Center of PBC School of Finance, and the National Natural Science Foundation of China, grant #71790591.

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