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Dumb money: Mutual fund flows and the cross-section of stock returns

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Author Info
Frazzini, Andrea
Lamont, Owen A.

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Abstract

We use mutual fund flows as a measure of individual investor sentiment for different stocks, and find that high sentiment predicts low future returns. Fund flows are dumb money-by reallocating across different mutual funds, retail investors reduce their wealth in the long run. This dumb money effect is related to the value effect: high sentiment stocks tend to be growth stocks. High sentiment also is associated with high corporate issuance, interpretable as companies increasing the supply of shares in response to investor demand.

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File URL: http://www.sciencedirect.com/science/article/B6VBX-4RX077F-1/1/f116d4503a598779755477b0d23b8843
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Publisher Info
Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 88 (2008)
Issue (Month): 2 (May)
Pages: 299-322
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Handle: RePEc:eee:jfinec:v:88:y:2008:i:2:p:299-322

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Web page: http://www.elsevier.com/locate/inca/505576

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February. [Downloadable!] (restricted)
  2. William N. Goetzmann & Massimo Massa, 2000. "Daily Momentum and Contrarian Behavior of Index Fund Investors," NBER Working Papers 7567, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March. [Downloadable!] (restricted)
  4. Prem C. Jain & Joanna Shuang Wu, 2000. "Truth in Mutual Fund Advertising: Evidence on Future Performance and Fund Flows," Journal of Finance, American Finance Association, vol. 55(2), pages 937-958, 04. [Downloadable!] (restricted)
  5. Owen A. Lamont, 2002. "Evaluating Value Weighting: Corporate Events and Market Timing," NBER Working Papers 9049, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
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  7. Goetzmann, William N. & Massa, Massimo, 2002. "Daily Momentum and Contrarian Behavior of Index Fund Investors," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(03), pages 375-389, September. [Downloadable!]
  8. Eli Ofek & Matthew Richardson, 2003. "DotCom Mania: The Rise and Fall of Internet Stock Prices," Journal of Finance, American Finance Association, vol. 58(3), pages 1113-1138, 06. [Downloadable!] (restricted)
  9. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March. [Downloadable!] (restricted)
  10. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May. [Downloadable!] (restricted)
  11. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2005. "On the Industry Concentration of Actively Managed Equity Mutual Funds," Journal of Finance, American Finance Association, vol. 60(4), pages 1983-2011, 08. [Downloadable!] (restricted)
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  12. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Dasgupta, Amil & Prat, Andrea & Verardo, Michela, 2007. "Institutional Trade Persistence and Long-Term Equity Returns," CEPR Discussion Papers 6374, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Joseph Chen & Samuel Hanson & Harrison Hong & Jeremy C. Stein, 2008. "Do Hedge Funds Profit From Mutual-Fund Distress?," NBER Working Papers 13786, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Braverman, Oded & Kandel, Shmuel & Wohl, Avi, 2005. "The (Bad?) Timing of Mutual Fund Investors," CEPR Discussion Papers 5243, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Foucault, Thierry & Themar, David & Sraer, David, 2008. "Individual investors and volatility," Les Cahiers de Recherche 899, HEC Paris. [Downloadable!]
    Other versions:
  5. James Choi & David Laibson & Brigitte Madrain & Andrew Metrick, 2007. "Reinforcement Learning in Investment Behavior," Levine's Bibliography 122247000000001737, UCLA Department of Economics. [Downloadable!]
  6. Rani Hoitash & Murugappa (Murgie) Krishnan, 2008. "Herding, momentum and investor over-reaction," Review of Quantitative Finance and Accounting, Springer, vol. 30(1), pages 25-47, January. [Downloadable!] (restricted)
  7. Schmeling, Maik, 2006. "Institutional and Individual Sentiment: Smart Money and Noise Trader Risk," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-337, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
    Other versions:
  8. Jennifer Huang & Jiang Wang, 2008. "Market Liquidity, Asset Prices and Welfare," NBER Working Papers 14058, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Marilyn Clark-Murphy & Paul Gerrans & Craig Speelman, 2009. "Return Chasing as a Driver in Individual Retirement Savings Investment Choices: Evidence from Australia," Journal of Family and Economic Issues, Springer, vol. 30(1), pages 4-19, March. [Downloadable!] (restricted)
  10. Raghuram G. Rajan, 2005. "Has financial development made the world riskier?," Proceedings, Federal Reserve Bank of Kansas City, issue Aug, pages 313-369. [Downloadable!]
    Other versions:
  11. Jennifer Huang & Jiang Wang, 2008. "Liquidity and Market Crashes," NBER Working Papers 14013, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Vincent Glode & Burton Hollifield & Marcin Kacperczyk & Shimon Kogan, 2009. "Is Investor Rationality Time Varying? Evidence from the Mutual Fund Industry," NBER Working Papers 15038, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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