Gruber (1996) and Zheng (1999) examine the relationship between fund cash flow and subsequent fund performance using quarterly net flow and show the evidence of smart money effect. However, Sapp and Tiwari(2004) show smart money effect is wholly explained by momentum factor and Keswani and Stolin (2008)emphasize the frequency of cash flow data. This study investigates the relationship between fund cash flow and performance using monthly net flow, inflow, and outflow. We find the evidence of smart money effect after controlling for the momentum factor. Especially, cash flow into small funds leads to positive abnormal returns significantly but cash flow out of large funds otherwise makes negative abnormal returns. The results that differ from the previous studies come from the frequency of cash flow data and the period of analysis.
Keywords: Smart money effect, Fund performance, Fund inflow, Fund outflow
