Journal of Financial Economics Vol. 66 No. 2-3 2002
Who underreacts to cash-flow news? evidence from trading between individuals and institutions
Abstract
A large body of literature suggests that firm-level stock prices “underreact” to news about future cash flows; i.e., shocks to a firm's expected cash flows are positively correlated with shocks to expected returns on its stock. We examine the joint behavior of returns, cash-flow news, and trading between individuals and institutions. Institutions buy shares from (sell shares to) individuals in response to positive (negative) cash-flow news, thus exploiting the underreaction phenomenon. Institutions are not simply following price momentum strategies: When price goes up (down) in the absence of any cash-flow news, institutions sell shares to (buy shares from) individuals. Although institutions are trading in the “right” direction, institutions as a group outperform individuals by only 1.44% per annum before transaction and other costs, because they are extremely conservative in deviating from the value-weighted market index.
- DOI
- 10.1016/s0304-405x(02)00229-5
- Volume
- 66
- Issue
- 2-3
- Pages
- 409-462
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref