The Moderating Role of Fund Size on the Relationship between Disposition effect and Portfolio Financial Performance of Mutual Funds in Kenya

Abstract

Several Kenyan mutual funds' financial performance has recently been on the downturn. Overall, variations in critical criteria reveal variable economic performance over time among Kenya's mutual funds. It was crucial to assess whether the portfolio performance pattern may be attributed to behavioral investing traps. The objective of this study was to determine how the disposition effect affected the financial performance, and how closely the fund size affected the relationship between behavioral investment traps and mutual funds' performance. The research method used was a causal research design. Data from a study panel were gathered. Over an eleven-year period, from 2011 to 2021, secondary data was obtained from mutual funds' previously published financial statements. Secondary data was acquired using the data collection tool. Data analysis was done with Stata software, version 15. The unit root test, a stationarity test, was carried out. Panel data regression was applied.  The use of regression analysis with fixed and random effects was also carried out. The Levin-Lin-Chu test, the Augmented Dickey-Fuller test, the Im-Pesaran and Shin tests, the Philips-Peron test, and the Hadri 2000 test were all used to evaluate the validity and reliability of the data. Jarque-Bera test was employed to evaluate normality. In the panel analysis, the random effects model and the fixed effects model were separated using the Hausman test. The variables were distributed properly, as shown by the skewedness and kurtosis tests. There was no approaching multicollinearity among the variables, according to the pairwise correlation study. The results of this study revealed that disposition effect had a negative but substantial influence on financial performance of mutual funds in Kenya with a regression coefficient of -0.5455628. The study additionally found that fund size with a probability value of 0.1560 which was not significant. This therefore shows that fund size does not have a significant effect on the relationship between disposition effect and mutual funds financial performance. The results of this study demonstrated that the disposition effect had a negative but considerable impact on the financial performance of the Kenyan mutual fund. This suggested that the financial performance of mutual funds in Kenya is subject to a sizeable yet adverse disposition effect. According to the results of the multiple regression study, the financial performance of mutual funds in Kenya was negatively but significantly impacted by the disposition effect. But when institutional investors and fund managers are dissecting financial investing decisions, they should not use behavioral investment traps in isolation. Based on the findings, stakeholders should be aware of the information that fund managers in institutional investors are not insusceptible from behavioral biases arising from behavioral finance in the financial investment decision making processes.