The Impact of the Arab Spring and the Ebola Outbreak on African Equity Mutual Fund Investor Decisions

Financial development and stock markets have been widely considered to be key factors in economic growth. Among institutional investors, mutual funds play a key role in providing financial resources to stock markets, particularly in developing countries. Different from other investments, mutual fund flows could be affected by retail investors’ behavior and their overreaction to specific events. We considered 78 equity mutual funds that are geographically specialized in African countries and observed monthly flows and performance for the period of 2006–2015. We find that two major events, Ebola and the Arab Spring, significantly affected the fund flows, controlling for fund performance, expenses and market returns. Retail investors over-reacted to these major events, withdrawing their savings from the African mutual funds. This result is particularly strong when connected to the media coverage of these events: the higher the number of articles about Arab Spring and Ebola, the higher the withdrawals. These irrational investors’ behavior damaged the funds’ managers market timing ability, and reduced the equity capital injection into African stock markets. Our results have several implications for both holders of frontier market mutual funds and the overall asset management industry.