Foreign ownership, institutional distance and mutual fund performance: Evidence from China

The existing literature documents mixed results on the impact of formal institutional distance on the performance of cross-border business. We contribute to this debate by providing evidence in the context of the Chinese mutual fund industry which was recently fully opened to foreign participants. Using a sample of 2115 actively managed equity mutual funds coming from 125 Chinese fund companies covering the period between July 2006 and September 2020, we show a negative relationship between formal institutional distance and funds' risk-adjusted performance. The funds offered by international joint venture fund companies (IJVs) with high institutional distance underperform the comparable domestic funds, whilst such an underperformance is not observed for the funds coming from IJVs with low institutional distance. Consistently, the institutional distance increases the probability of the cooperation failure between the foreign and the domestic partners of the IJVs. Policy implications for the international joint venture in the fund industry are discussed.