LAUSR

This paper investigates the implications of investor learning for the sensitivity of mutual fund flows to past performance. We illustrate theoretically that when some sophisticated investors learn from past fund performance to form their posterior expectations of managerial ability, the flow-performance sensitivity should be weaker for funds with more volatile past performance and longer track records. Moreover, the dampening effects of performance volatility and fund age on the flow-performance sensitivity should be stronger for funds attracting more sophisticated investors. We provide supporting evidence for this investor learning hypothesis using mutual fund flows and compare the relative level of sophistication among investors in load versus no-load funds, institutional versus retails funds, and star versus non-star funds.