Abstract
Mutual fund investing is one of the main drivers of the U.S. economy. Mutual fund returns on
managed assets is one of the most researched topics in business academics, but mutual fund flows
(the growth in fund assets controlling for fund returns) has been studied to a much lesser extent.
Social capital is derived from the mutual trust and collective altruistic tendencies between people
within communities that drive unselfish and compassionate behavior. Many examples in the prior
literature have used social capital to explain social, political, and business phenomena. This
research delves into the relationship between mutual fund flows and social capital, focusing not
only on the direct relationship between mutual fund flows and social capital, but also on the
moderating effect that social capital has on previously identified drivers of fund flows, including
fund returns and the mutual fund agency problem of window dressing. Fund returns have been
shown to have a positive direct effect on mutual fund flows as investors chase returns.
Conversely, window dressing has been shown to have a negative effect on mutual fund flows,
because fund managers engaging in window dressing behaviors implicitly deceive investors by
exiting poorly performing equity holdings and by increasing highly performing equity holdings
during a reporting period delay, thus making a risky bet on their performance during the delay
period. The present research adds to the literature by demonstrating not only social capital’s
positive and direct impact on mutual fund flows and its negative and direct impact on mutual fund
window dressing, but also its moderating effect on the impact that fund returns have on mutual
fund flows, and the moderating effect that social capital has on window dressing behavior’s
impact on fund flows. The research also demonstrates that these impacts are not only statistically
significant, but also practically significant. Suggestions for practitioners are identified, as is
potential future research.