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Smart money, dumb money, and capital market anomalies

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  • Akbas, Ferhat
  • Armstrong, Will J.
  • Sorescu, Sorin
  • Subrahmanyam, Avanidhar

Abstract

We investigate the dual notions that “dumb money” exacerbates well-known stock return anomalies and “smart money” attenuates these anomalies. We find that aggregate flows to mutual funds (dumb money) appear to exacerbate cross-sectional mispricing, particularly for growth, accrual, and momentum anomalies. In contrast, hedge fund flows (smart money) appear to attenuate aggregate mispricing. Our results suggest that aggregate flows to mutual funds can have real adverse allocation effects in the stock market and that aggregate flows to hedge funds contribute to the correction of cross-sectional mispricing.

Suggested Citation

  • Akbas, Ferhat & Armstrong, Will J. & Sorescu, Sorin & Subrahmanyam, Avanidhar, 2015. "Smart money, dumb money, and capital market anomalies," Journal of Financial Economics, Elsevier, vol. 118(2), pages 355-382.
    • Handle: RePEc:eee:jfinec:v:118:y:2015:i:2:p:355-382
    DOI: 10.1016/j.jfineco.2015.07.003
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    More about this item

    Keywords

    Stock return anomalies; Mutual funds; Hedge funds; Fund flows; Mispricing;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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