Avoiding Idiosyncratic Volatility: Flow Sensitivity to Individual Stock Returns

Marco Di Maggio, Francesco A. Franzoni, Shimon Kogan and Ran Xing
Additional contact information
Marco Di Maggio: Harvard Business School; NBER
Francesco A. Franzoni: Universita della Svizzera italiana; Swiss Finance Institute; CEPR
Shimon Kogan: Reichman University; University of Pennsylvania
Ran Xing: Stockholm University; Aarhus University; Swedish House of Finance

No 23-108, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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: News trading; mutual fund performance; fund flows; limits of arbitrage; financial constraints; earnings announcements (search for similar items in EconPapers)
JEL-codes: G12 G23 (search for similar items in EconPapers)
Pages: 114 pages
Date: 2023-11
New Economics Papers: this item is included in nep-fmk and nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp23108

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