Smart Money, Dumb Money, and Capital Market Anomalies

75 Pages Posted: 16 Mar 2014 Last revised: 20 Mar 2015

Ferhat Akbas

University of Illinois at Chicago

Will J. Armstrong

Texas Tech University - Area of Finance

Sorin M. Sorescu

Texas A&M University - Department of Finance

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Date Written: March 19, 2015

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 may have real adverse allocation effects in the stock market, while aggregate flows to hedge funds contribute to the correction of cross-sectional mispricing.

Keywords: Mutual funds, Hedge funds, Sock return anomalies

JEL Classification: G12

Suggested Citation

Akbas, Ferhat and Armstrong, Will J. and Sorescu, Sorin M. and Subrahmanyam, Avanidhar, Smart Money, Dumb Money, and Capital Market Anomalies (March 19, 2015). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2409218 or http://dx.doi.org/10.2139/ssrn.2409218

Ferhat Akbas

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60076
United States

Will J. Armstrong

Texas Tech University - Area of Finance ( email )

Lubbock, TX 79409
United States

Sorin M. Sorescu (Contact Author)

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States
979-458-0380 (Phone)

HOME PAGE: http://wehner.tamu.edu/finc.www/ssorescu/

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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