Smart money, dumb money, and capital market anomalies

Ferhat Akbas, Will J. Armstrong, Sorin Sorescu, Avanidhar Subrahmanyam

Research output: Contribution to journalArticle

41 Scopus citations

Abstract

We investigate the dual notions that "dumb money" exacerbates well-known stock return anomalies and "smart money" attenuates these anomalies. We find that aggregate flows to mutual funds (dumb money) appear to exacerbate cross-sectional mispricing, particularly for growth, accrual, and momentum anomalies. In contrast, hedge fund flows (smart money) appear to attenuate aggregate mispricing. Our results suggest that aggregate flows to mutual funds can have real adverse allocation effects in the stock market and that aggregate flows to hedge funds contribute to the correction of cross-sectional mispricing.

Original languageEnglish
Article number2570
Pages (from-to)355-382
Number of pages28
JournalJournal of Financial Economics
Volume118
Issue number2
DOIs
StatePublished - Nov 2015

Keywords

  • Fund flows
  • Hedge funds
  • Mispricing
  • Mutual funds
  • Stock return anomalies

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