Costly Information Production, Information Intensity, and Mutual Fund Performance

Abstract

This study examines the concentration of active mutual fund managers' research efforts toward information-intense stocks and the degree to which they are successful in such efforts. Using the contribution of jumps to stock return variance as a proxy for information intensity, we find that both skilled and unskilled fund managers are attracted to high information-intensity stocks. Moreover, performance persistence is only observed among funds investing in high information-intensity stocks. We show that our results are robust to controlling for characteristics of fund stock holdings and measures of fund activeness. Finally, we find a higher flow sensitivity to past performance of funds with higher information intensity. These findings suggest that investing in high information-intensity stocks is an important strategy by fund managers and has significant impact on investor fund selection decisions.

Keywords: information intensity; performance persistence