TY  - JOUR
AU  - Cohen,Randolph B.
AU  - Gompers,Paul A.
AU  - Vuolteenaho,Tuomo
TI  - Who Underreacts to Cash-Flow News? Evidence from Trading between Individuals and Institutions
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8793
PY  - 2002
Y2  - February 2002
UR  - http://www.nber.org/papers/w8793
L1  - http://www.nber.org/papers/w8793.pdf
N1  - Author contact info:
Randolph Cohen
MIT
E-Mail: rbcohen@mit.edu

Paul Gompers
Harvard Business School
Baker Library 263
Soldiers Field
Boston, MA 02163
Tel: 617/495-6297
Fax: 617/496-8443
E-Mail: pgompers@hbs.edu

Tuomo Vuolteenaho
Arrowstreet Capital
200 Clarendon Street #30
Boston, MA 02116-5021
Tel: 617/496-6284
Fax: 617/495-8570
E-Mail: tvuolteenaho@arrowstreetcapital.com
AB  - 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.
ER  -