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

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