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Who Underreacts to Cash-Flow News? Evidence from Trading between Individuals and Institutions / Randolph B. Cohen, Paul A. Gompers, Tuomo Vuolteenaho.
- Format:
- Book
- Author/Creator:
- Cohen, Randolph B.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w8793.
- NBER working paper series no. w8793
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2002.
- Summary:
- 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 estimate a vector autoregession to examine the joint behavior of returns, cash-flow news, and trading between individuals and institutions. Our main finding is that institutions buy shares from individuals in response to good cash-flow news, thus exploiting the underreaction phenomenon. Institutions are not simply following price momentum strategies: When price goes up in the absence of positive cash-flow news, institutions sell shares to individuals. Although institutions are trading in the 'right' direction, institutions as a group outperform individuals by only 1.44 percent per annum before transaction and other costs, because they are extremely conservative in deviating from the value-weight market index.
- Notes:
- Print version record
- February 2002.
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