DP10472 Investing in Low-Trust Countries: Trust in the Global Mutual Fund Industry

Author(s): Massimo Massa, Chengwei Wang, Hong Zhang, Jian Zhang
Publication Date: March 2015
Keyword(s): International Investments, Mutual Funds, Performance, Trust
JEL(s): g23
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10472

We hypothesize that trust plays an important role in affecting the activeness and effectiveness of the global mutual fund industry. Empirically, trust is positively associated with the activeness of domestic funds, whereas for internationals mutual funds conducting cross-border investments activeness is bounded by the trust of low-trust countries. In both cases, trust-related active share delivers superior performance, whereas the economic magnitude is larger for cross-border investments (around 2% per year). Our results suggest that trust, including both trust in managers and trust in the market, may significantly affect the development of financial intermediaries and the efficiency of global investment.