IDEAS home Printed from https://ideas.repec.org/a/eee/jfinec/v173y2025ics0304405x25001667.html

Taking sides on return predictability

Author

Listed:
  • McLean, R. David
  • Pontiff, Jeffrey
  • Reilly, Christopher

Abstract

We assess how nine different categories of market participants trade relative to a comprehensive forecasted-return variable based on 193 predictors. Firms and short sellers tend to be the smart money—both sell stocks with low-forecasted returns, and their trades predict returns in the intended direction. Retail investors trade against forecasted returns. Retail investors’ and institutions’ trades predict returns opposite to the intended direction. This poor trading performance is driven by trades in stocks with either high- or low-forecasted returns. The forecasted-return variable predicts returns more strongly in stocks with more intense retail trading, consistent with retail investors exacerbating mispricing.

Suggested Citation

  • McLean, R. David & Pontiff, Jeffrey & Reilly, Christopher, 2025. "Taking sides on return predictability," Journal of Financial Economics, Elsevier, vol. 173(C).
    • Handle: RePEc:eee:jfinec:v:173:y:2025:i:c:s0304405x25001667
    DOI: 10.1016/j.jfineco.2025.104158
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X25001667
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jfineco.2025.104158?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Brad M. Barber & Terrance Odean & Ning Zhu, 2009. "Do Retail Trades Move Markets?," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 151-186, January.
    2. Ron Kaniel & Gideon Saar & Sheridan Titman, 2008. "Individual Investor Trading and Stock Returns," Journal of Finance, American Finance Association, vol. 63(1), pages 273-310, February.
    3. Brad M. Barber & Xing Huang & Philippe Jorion & Terrance Odean & Christopher Schwarz, 2024. "A (Sub)penny for Your Thoughts: Tracking Retail Investor Activity in TAQ," Journal of Finance, American Finance Association, vol. 79(4), pages 2403-2427, August.
    4. Joachim Freyberger & Andreas Neuhierl & Michael Weber & Andrew KarolyiEditor, 2020. "Dissecting Characteristics Nonparametrically," Review of Financial Studies, Society for Financial Studies, vol. 33(5), pages 2326-2377.
    5. Cristina Cella & Andrew Ellul & Mariassunta Giannetti, 2013. "Investors' Horizons and the Amplification of Market Shocks," The Review of Financial Studies, Society for Financial Studies, vol. 26(7), pages 1607-1648.
    6. David McLean, R. & Pontiff, Jeffrey & Watanabe, Akiko, 2009. "Share issuance and cross-sectional returns: International evidence," Journal of Financial Economics, Elsevier, vol. 94(1), pages 1-17, October.
    7. Andy Puckett & Xuemin (Sterling) Yan, 2011. "The Interim Trading Skills of Institutional Investors," Journal of Finance, American Finance Association, vol. 66(2), pages 601-633, April.
    8. Aragon, George O. & Hertzel, Michael & Shi, Zhen, 2013. "Why Do Hedge Funds Avoid Disclosure? Evidence from Confidential 13F Filings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(5), pages 1499-1518, October.
    9. Ron Kaniel & Shuming Liu & Gideon Saar & Sheridan Titman, 2012. "Individual Investor Trading and Return Patterns around Earnings Announcements," Journal of Finance, American Finance Association, vol. 67(2), pages 639-680, April.
    10. Edelen, Roger M. & Ince, Ozgur S. & Kadlec, Gregory B., 2016. "Institutional investors and stock return anomalies," Journal of Financial Economics, Elsevier, vol. 119(3), pages 472-488.
    11. Vikas Agarwal & Wei Jiang & Yuehua Tang & Baozhong Yang, 2013. "Uncovering Hedge Fund Skill from the Portfolio Holdings They Hide," Journal of Finance, American Finance Association, vol. 68(2), pages 739-783, April.
    12. R. David Mclean & Jeffrey Pontiff, 2016. "Does Academic Research Destroy Stock Return Predictability?," Journal of Finance, American Finance Association, vol. 71(1), pages 5-32, February.
    13. John M. Griffin & Jin Xu, 2009. "How Smart Are the Smart Guys? A Unique View from Hedge Fund Stock Holdings," The Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2331-2370, July.
    14. Soeren Hvidkjaer, 2008. "Small Trades and the Cross-Section of Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1123-1151, May.
    15. Jeffrey Pontiff & Artemiza Woodgate, 2008. "Share Issuance and Cross‐sectional Returns," Journal of Finance, American Finance Association, vol. 63(2), pages 921-945, April.
    16. Ekkehart Boehmer & Charles M. Jones & Xiaoyan Zhang, 2008. "Which Shorts Are Informed?," Journal of Finance, American Finance Association, vol. 63(2), pages 491-527, April.
    17. Grinblatt, Mark & Keloharju, Matti, 2000. "The investment behavior and performance of various investor types: a study of Finland's unique data set," Journal of Financial Economics, Elsevier, vol. 55(1), pages 43-67, January.
    18. Kenneth R. French, 2008. "Presidential Address: The Cost of Active Investing," Journal of Finance, American Finance Association, vol. 63(4), pages 1537-1573, August.
    19. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2008. "Unobserved Actions of Mutual Funds," The Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2379-2416, November.
    20. Ekkehart Boehmer & Charles M. Jones & Xiaoyan Zhang & Xinran Zhang, 2021. "Tracking Retail Investor Activity," Journal of Finance, American Finance Association, vol. 76(5), pages 2249-2305, October.
    21. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, April.
    22. Amil Dasgupta & Andrea Prat & Michela Verardo, 2011. "Institutional Trade Persistence and Long‐Term Equity Returns," Journal of Finance, American Finance Association, vol. 66(2), pages 635-653, April.
    23. Chordia, Tarun & Subrahmanyam, Avanidhar & Tong, Qing, 2014. "Have capital market anomalies attenuated in the recent era of high liquidity and trading activity?," Journal of Accounting and Economics, Elsevier, vol. 58(1), pages 41-58.
    24. Barber, Brad M. & Odean, Terrance, 2013. "The Behavior of Individual Investors," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1533-1570, Elsevier.
    25. Aragon, George O. & Spencer Martin, J., 2012. "A unique view of hedge fund derivatives usage: Safeguard or speculation?," Journal of Financial Economics, Elsevier, vol. 105(2), pages 436-456.
    26. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, February.
    27. Vikas Agarwal & Vyacheslav Fos & Wei Jiang, 2013. "Inferring Reporting-Related Biases in Hedge Fund Databases from Hedge Fund Equity Holdings," Management Science, INFORMS, vol. 59(6), pages 1271-1289, June.
    28. Michaely, Roni & Thaler, Richard H & Womack, Kent L, 1995. "Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?," Journal of Finance, American Finance Association, vol. 50(2), pages 573-608, June.
    29. Eric K. Kelley & Paul C. Tetlock, 2013. "How Wise Are Crowds? Insights from Retail Orders and Stock Returns," Journal of Finance, American Finance Association, vol. 68(3), pages 1229-1265, June.
    30. Ralph S. J. Koijen & Motohiro Yogo, 2019. "A Demand System Approach to Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 127(4), pages 1475-1515.
    31. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
    32. repec:bla:jfinan:v:53:y:1998:i:3:p:1131-1147 is not listed on IDEAS
    33. Andrew Y. Chen & Tom Zimmermann, 2022. "Open Source Cross-Sectional Asset Pricing," Critical Finance Review, now publishers, vol. 11(2), pages 207-264, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Peress, Joel & Schmidt, Daniel, 2021. "Noise traders incarnate: Describing a realistic noise trading process," Journal of Financial Markets, Elsevier, vol. 54(C).
    2. Taha Havakhor & Mohammad Saifur Rahman & Tianjian Zhang & Chenqi Zhu, 2025. "Tech-Enabled Financial Data Access, Retail Investors, and Gambling-Like Behavior in the Stock Market," Management Science, INFORMS, vol. 71(2), pages 1646-1670, February.
    3. Fung, Scott & Obaid, Khaled & Tsai, Shih-Chuan, 2024. "Information acquisition and processing skills of institutions and retail investors around information shocks," Journal of Empirical Finance, Elsevier, vol. 77(C).
    4. Warkulat, Sonja & Pelster, Matthias, 2024. "Social media attention and retail investor behavior: Evidence from r/wallstreetbets," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    5. Barrot, Jean-Noel & Kaniel, Ron & Sraer, David, 2016. "Are retail traders compensated for providing liquidity?," Journal of Financial Economics, Elsevier, vol. 120(1), pages 146-168.
    6. Barber, Brad M. & Odean, Terrance, 2013. "The Behavior of Individual Investors," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1533-1570, Elsevier.
    7. Vikas Agarwal & Stefan Ruenzi & Florian Weigert, 2018. "Unobserved Performance of Hedge Funds," Working Papers on Finance 1825, University of St. Gallen, School of Finance.
    8. Chen, Hung-Ling & Chow, Edward H. & Shiu, Cheng-Yi, 2015. "The informational role of individual investors in stock pricing: Evidence from large individual and small retail investors," Pacific-Basin Finance Journal, Elsevier, vol. 31(C), pages 36-56.
    9. Danny Lo, 2015. "Essays in Market Microstructure and Investor Trading," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 4-2015, January-A.
    10. Kim, Donghoon & Kang, Jangkoo & Roh, Soohyun, 2025. "Market participants' trading behavior toward anomalies: Evidence from the Korean market," Pacific-Basin Finance Journal, Elsevier, vol. 90(C).
    11. Danny Lo, 2015. "Essays in Market Microstructure and Investor Trading," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 22, July-Dece.
    12. Xinyu Cui & Olga Kolokolova & Jiaguo (George) Wang, 2024. "On the Other Side of Hedge Fund Equity Trades," Management Science, INFORMS, vol. 70(6), pages 3684-3710, June.
    13. Feifei Wang & Xuemin Sterling Yan & Lingling Zheng, 2024. "Do sophisticated investors follow fundamental analysis strategies? Evidence from hedge funds and mutual funds," Review of Accounting Studies, Springer, vol. 29(2), pages 1097-1146, June.
    14. Wang, Shu-Feng & Lee, Kuan-Hui & Woo, Min-Cheol, 2017. "Do individual short-sellers make money? Evidence from Korea," Journal of Banking & Finance, Elsevier, vol. 79(C), pages 159-172.
    15. Jeremy Michels, 2025. "Retail investor trade and the pricing of earnings," Review of Accounting Studies, Springer, vol. 30(1), pages 575-610, March.
    16. Choi, Darwin, 2019. "Disposition sales and stock market liquidity," Journal of Financial Markets, Elsevier, vol. 45(C), pages 19-36.
    17. Sun, Xuchu & Zhang, Qing & Li, Tangrong, 2026. "How are retail investors informed? A perspective from institutional trading intention exposure," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 106(C).
    18. Chague, Fernando Daniel & Bueno, Rodrigo de Losso da Silveira & Giovannetti, Bruno Cara, 2018. "The short-selling skill of institutions and individuals: a market-wide and out-of-sample analysis," Textos para discussão 469, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    19. Tian, Xiao & Do, Binh & Duong, Huu Nhan & Kalev, Petko S., 2015. "Liquidity provision and informed trading by individual investors," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 143-162.
    20. Ben-David, Itzhak & Birru, Justin & Rossi, Andrea, 2019. "Industry familiarity and trading: Evidence from the personal portfolios of industry insiders," Journal of Financial Economics, Elsevier, vol. 132(1), pages 49-75.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:173:y:2025:i:c:s0304405x25001667. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505576 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.