Abstract

http://ssrn.com/abstract=2263944
 
 

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Capital Flows in Rational Markets


Francesco A. Franzoni


University of Lugano; Swiss Finance Institute

Martin C. Schmalz


The Stephen M. Ross School of Business at the University of Michigan

December 7, 2013

Swiss Finance Institute Research Paper No. 13-41
Ross School of Business Paper No. 1194

Abstract:     
We provide a rational model of capital allocation to projects with uncertain exposure to a systematic risk factor. We show that signal-to-noise ratios are highest when the factor realization is close to zero. As a result, investors redirect more resources across projects during these times. We measure the speed of capital reallocation with the sensitivity of mutual fund flows to performance and find supporting evidence for the model's nonlinear and linear predictions.

Number of Pages in PDF File: 66

Keywords: capital allocation, mutual funds, flow-performance

JEL Classification: G00, G20

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Date posted: May 13, 2013 ; Last revised: February 7, 2014

Suggested Citation

Franzoni, Francesco A. and Schmalz, Martin C., Capital Flows in Rational Markets (December 7, 2013). Swiss Finance Institute Research Paper No. 13-41; Ross School of Business Paper No. 1194. Available at SSRN: http://ssrn.com/abstract=2263944 or http://dx.doi.org/10.2139/ssrn.2263944

Contact Information

Francesco A. Franzoni
University of Lugano ( email ) ( email )
University of Lugano
Via G. Buffi 13
Lugano, 6904
Switzerland
Swiss Finance Institute ( email ) ( email )
University of Lugano
Via G. Buffi 13
Lugano, 6904
Switzerland
Martin C. Schmalz (Contact Author)
The Stephen M. Ross School of Business at the University of Michigan ( email )
701 Tappan St
R5456
Ann Arbor, MI 48109-1234
United States
7347630304 (Phone)
HOME PAGE: http://https://sites.google.com/site/martincschmalz/
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