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We examine how the relation between mutual fund performance and fund flows has changed over time by separating our sample into two periods (1978-87 and 1988-97). We document an increase in the flow-performance asymmetry in the second period that exacerbates the adverse incentive for fund managers to increase portfolio risk. We develop a measure ofthe elasticity offund flows with respect to performance, which filters out the confounding influence of greater aggregate fund flows in the second period and allows an examination of whether current investors place more emphasis on prior performance when selecting funds. We conclude that, though top performing funds are rewarded with greater fund flows in the second halfofour sample, the change is due solely to the increase in aggregate fund flows and not to an increased reliance on performance by individual fund investors.JEL classification: G1, G2, L1.

Size and book‐to‐market equity are shown to transcend beta in explaining stock returns. One possible explanation of the book‐to‐market equity effect is overreaction. We investigate the effect of size, book‐to‐market equity, prior returns, and beta on stock returns. We find significant reversals in January consistent with overreaction. We find a strong positive relation between returns and prior returns for February through December. Both patterns are distinct from either a size or book‐to‐market equity effect. Book‐to‐market equity is significantly related to returns, with some evidence of a stronger effect in January.

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