Too Positive to Persuade? Inverted U-Shaped Effects of Fund Managers’ Tones on Fund Flows

Fund managers’ positive tone often attracts investor inflows. However, in low-regulation markets, fund managers are more likely to engage in impression management by employing overly positive tones. Existing research remains inconclusive on whether overly positive tones further enhance fund inflows or lead to adverse outcomes in these contexts. To examine the relationship between managers’ tone and fund flows, this study measures tone based on a sentiment lexicon and a weighting algorithm and finds an inverted U-shaped relationship between the two in the Chinese mutual fund market from 2009 to 2023. Further analysis shows that fund managers’ honesty affects investors’ trust in tone information, thereby moderating the impact of tone on fund flows; lottery-like holdings enhance investors’ perception of portfolio risk, making the inverted U-shaped relationship more pronounced. Additionally, an overly positive tone raises investor attention but dampens sentiment, contributing to the inverted U-shape curve. The inverted U-shaped relationship weakens when periodic reports are poorly readable. Compared to institutional investors, individual investors exhibit stronger reactions to prospective tone. These findings indicate that in low-regulation markets, overly positive tone in fund managers’ disclosures may erode investor trust and information transparency. This underscores the importance of strengthening the regulation of qualitative disclosure authenticity, while fund managers should maintain integrity and caution, avoid exaggerating expectations, and promote rational investment and market stability.