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Emerging Stars and Developed Neighbors: The Effects of Development Imbalance and Political Shocks on Mutual Fund Investments in China

Authors

  • Shu Lin,

  • Shu Tian,

  • Eliza Wu

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    • Shu Lin is an Associate Professor of Accounting in the School of Business at Nanjing University in Nanjing, P.R. China. Shu Tian (Corresponding Author) is an Assistant Professor of Finance at the School of Management at Fudan University in Shanghai, P.R. China. Eliza Wu is an Associate Professor of Finance at the UTS Business School at the University of Technology in Sydney, NSW, Australia.


  • The authors thank Bill Christie (Editor), an anonymous referee, Lu Zheng, Qiao Yu, Qian Sun, Longzhen Fan, and seminar participants at the University of Technology, Sydney for insightful comments and helpful suggestions. Ms. Wendy Jennings helped with excellent proofreading. We would like to acknowledge financial support from the National Natural Science Foundation of China (Grants No. NSFC-71002025, NSFC-70932003, and NSFC-70971025), the National Social Science Foundation of China (Grant No. 08&ZD050), the Shanghai Foundation for Development of Science and Technology (Grant No. 11692102200), and Fundamental Research Funds for the Central Universities, China. All errors are our own.

Abstract

This paper examines the influence of regional economic development on mutual funds investment decisions. Using fund holdings from 2003 to 2008, we find that Chinese mutual funds that collectively reside in the developed coastal region have the ability to select “star” firms from neighboring inland areas and overweight them in their portfolios. However, they present a clear local bias within the coastal region. Such investment behavior is robust to political interventions. In particular, changes in political climate make mutual funds seek fundamentals like growth prospects and diversification benefits. Overall, economic and political factors significantly influence mutual funds investment decisions in emerging China.

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