Stock Repurchasing Bias of Mutual Funds

This paper investigates whether the positive emotions mutual fund managers have when they have sold a stock for a gain lead to a higher repurchasing probability of this stock in the future. Controlling for fund, stock, and time fixed effects, we show that the probability of a stock being repurchased by a mutual fund is on average around 17% higher if it was previously sold for a gain rather than for a loss. The effect is less pronounced if the stock price has increased after the sale of the stock, which may cause regret and a negative feeling that the stock has been sold in the first place. In line with positive emotions driving the repurchasing behavior, we find that when fund managers change jobs and work at a different fund, they still prefer to repurchase stocks that they sold for a gain at the fund they managed before. We find supportive evidence that this behavior is associated with lower fund performance: repurchased winners underperform repurchased losers by around 5% p.a. after the repurchase. Thus, investors should be aware that mutual fund managers' repurchasing decisions can be biased and eventually may hurt their performance.