Stock-Picking by Mutual Funds: Evidence from Their Trading in Family-Controlled Firms

Abstract

I find that mutual funds that invest heavily in publicly traded family firms (pro-FF funds) outperform other funds. Trading by funds, which overweigh family firms, predicts family firms’ future stock returns and earnings announcement surprises. Consistent with an informed fund hypothesis, pro-FF funds’ outperformance is greater when family firms they hold are harder to value or less liquid. I find that pro-FF funds acquire an information advantage by investing in family firms located geographically closer to them. Mutual funds realizes a positive aggregate return on family firms. Overall, this study shows that investing in family firms benefits mutual funds.