This study demonstrates that Chinese stock mutual funds exhibit persistent preference for growth stocks over value stocks. Despite the positive premium of value stocks over growth stocks, funds in aggregate manage to beat the market. Moreover, growth-oriented funds do not underperform their value-oriented peers. To solve these puzzles, we provide evidence for funds’ superior skill in picking growth stocks over value stocks, and conclude that such skill helps explain their growth tilt. Furthermore, we show that mutual funds trade against the retail investors, more so in growth stocks than in value stocks. Coupled with our finding that retail investors make more mistakes trading growth stocks than trading value stocks, we conclude that mutual funds optimize their information production to focus more on growth stocks so as to maximize returns.

We investigate a unique dataset that includes detailed bidding information of 783 Chinese IPOs. First, we find that institutional investors who participate in multiple IPOs on a single day suffer from limited attention and submit less precise bids. Second, we form several proxies for investor attention capacity and show that investors with larger attention capacities are less affected by the inattention bias. Furthermore, we show that investors are more affected by the inattention bias in IPOs that are more difficult to price. Moreover, we find that the allocation rule change from pro-rata to lottery leads to a reduction in investors’ multiple participations, and improves their bidding precision. Third, we show that investors are more likely to submit lower bids when participating in multiple IPOs. Consequently, the investors affected by the inattention bias are allocated fewer shares and earn less profit. Finally, we find that aggregate investor inattention at the IPO level significantly reduces the IPO's pricing efficiency.