Working Paper: NBER ID: w31360
Authors: Marco Di Maggio; Francesco Franzoni; Shimon Kogan; Ran Xing
Abstract: Despite positive and significant earnings announcement premia, we find that institutional investors reduce their exposure to stocks before earnings announcements. A novel result on the sensitivity of flows to individual stock returns provides a potential explanation. We show that extreme announcement returns for an individual holding lead to substantial outflows, controlling for overall performance, and they increase the probability of managers leaving the fund. Reducing the exposure to these stocks before the announcement mitigates the outflows. We build a model to describe and quantify this tradeoff. Overall, the paper identifies a new dimension of limits to arbitrage for institutions.
Keywords: No keywords provided
JEL Codes: G12; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| extreme announcement returns (Y60) | substantial outflows (F21) |
| timing of institutional trading (G14) | announcement of earnings (G14) |
| sensitivity of flows to individual stock returns (G17) | institutional trading behavior (G14) |
| high idiosyncratic volatility (G19) | abnormal sales (K42) |
| flow-performance sensitivity (C69) | larger outflows (F32) |