Taking Sides on Return Predictability

Abstract

We provide the most comprehensive study of market participation to date. We assess the informativeness of 9 different participants’ trades, and how each participant’s trades relate to 130 different variables that together reflect the cross-section of expected stock returns. Firms and short sellers tend to be the smart money—both sell stocks with low expected returns, and their trades predict returns in the intended direction. Firms, however, also seem to possess private information, while short sellers do not. Retail investors buy (sell) stocks with low (high) expected returns and their trades predict returns opposite to the intended direction. All 6 types of institutional investors are weighted towards stocks with low expected returns, but none of their trades robustly predict returns.

Keywords: Anomalies, Retail investors, Institutional investors, Short sellers, Hedge funds

JEL Classification: G10, G11, G14, G23