Publications
Publications
- 2023
- HBS Working Paper Series
Avoiding Idiosyncratic Volatility: Flow Sensitivity to Individual Stock Returns
By: Marco Di Maggio, Francesco Franzoni, Shimon Kogan and Ran Xing
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
New Trading; Mutual Funds; Fund Flows; Limits To Arbitrage; Financial Constraints; Earnings Announcements; Institutional Investing; Stocks
Citation
Di Maggio, Marco, Francesco Franzoni, Shimon Kogan, and Ran Xing. "Avoiding Idiosyncratic Volatility: Flow Sensitivity to Individual Stock Returns." Harvard Business School Working Paper, No. 23-072, March 2023. (Revise and Resubmit to The Journal of Finance.)