ABSTRACT This paper documents a negative relationship between beta uncertainty and the sensitivity of mutual fund flows to past performance. We interpret beta uncertainty as the potential difference in the interpretation of common information, which captures disagreement among investors arising from heterogeneous prior beliefs. Within a Bayesian learning framework, such disagreement weakens posterior belief updating and limits investors' inference about managerial skill from realized returns. Consistent with these predictions, we empirically show that higher beta uncertainty significantly lowers flow‐performance sensitivity. This effect is stronger when investors' priors are more heterogeneous and is more consistent with disagreement rather than ambiguity aversion. Learning from funds with lower beta uncertainty is more valuable, thereby strengthening investors' incentives to learn.
Jiaxun Song (Fri,) studied this question.