This paper provides an analysis of the impact of international portfolio flows on security returns. It concludes that opening a country to portfolio flows decreases its cost of capital without adverse effects on its securities markets. There is no convincing evidence that portfolio flows increase the volatility of equity returns or lead to excessive comovement of a country's equity returns with world equity returns. Though there has been much concern that portfolio flows create contagion effects, existing empirical evidence does not provide conclusive evidence that contagion due to uninformed investors is economically important. See Feldstein and Horioka (1980). 1 The 1996 numbers are obtained from World Bank (1997). 2 1 For most of the period following World War II, the economic significance of net capital flows wa s small. Further, net portfolio flows were even l ess important. Over recent years, net capital flows have become 1 much larger, especially towards developing econom...

This paper explores daily, international portfolio flows into and out of 44 countries from 1994 through 1998. We find several facts concerning the behavior of flows and their relationship with equity returns. First, we detect regional flow factors that have increased in importance through time. Second, the flows are stationary, but far more persistent than returns. Third, flows are strongly influenced by past returns, consistent with positive feedback trading by international investors. Fourth, inflows have positive forecasting power for future equity returns, statistically significant in emerging markets. Fifth, the sensitivity of local stock prices to foreign inflows is positive and large. Sixth, prices seem consistent with flow persistence, in that transitory inflows impact future returns negatively.

We investigate the value of active mutual fund management by examining the stockholdings and trades of mutual funds. We find that stocks widely held by funds do not outperform other stocks. However, stocks purchased by funds have significantly higher returns than stocks that are sold—this is true for large stocks as well as small stocks, and for value stocks as well as growth stocks. Moreover, growth-oriented funds exhibit better stockselection skills than income-oriented funds, especially in picking large growth stocks. Finally, funds trading more frequently have, at best, marginally better stock-selection skills than funds that trade less often. The Value of Active Mutual Fund Management: An Examination of the Stockholdings and Trades of Fund Managers I.

We review extensive evidence about how psychological biases affect investor behavior and prices. Systematic mispricing probably causes substantial resource misallocation. We argue that limited attention and overconfidence cause investor credulity about the strategic incentives of informed market participants. However, individuals as political participants remain subject to the biases and self-interest they exhibit in private settings. Indeed, correcting contemporaneous market pricing errors is probably not government’s relative advantage. Government and private planners should establish rules ex ante to improve choices and efficiency, including disclosure, reporting, advertising, and default-option-setting regulations. Especially

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The paper shows that the buy or sell recommendations of security analysts have a significant positive influence on the recommendations of the next two analysts. This influence can be traced to short-lived information in the most recent revisions. In contrast, the influence of the prevailing consensus is not stronger if the consensus accurately forecasts subsequent stock price movements. This indicates consensus herding consistent with models in which analysts herd based on little information. The consensus also has a stronger influence when market conditions are favorable. The resulting poorer information aggregation could cause bull markets to be intrinsically more "fragile" (e.g., Bikhchandani et al., J. Political Economy 100(5) (1992) 992-1026).

This essay surveys the body of research that asks how the efficiency of corporate investment is influenced by problems of asymmetric information and agency. I organize the material around two basic questions. First, does the external capital market channel the right amount of money to each firm? That is, does the market get across-firm allocations right, so that the marginal return to investment in firm i is the same as the marginal return to investment in firm j? Second, do internal capital markets channel the right amount of money to individual projects within firms? That is, does the internal capital budgeting process get withinfirm allocations right, so that the marginal return to investment in firm i’s division A is the same as the marginal return to investment in firm i’s division B? In addition to discussing the theoretical and empirical work that bears most directly on these questions, the essay also briefly sketches some of the implications of this work for broader issues in both macroeconomics and the theory of the firm.

The paper has also benefited from the comments of the participants at the Chicago Quantitative Alliance spring meeting, Federal Reserve Bank of New York finance workshop, Harvard University Department of Economics finance seminar, MIT Sloan School of Management finance brown-bag lunch and finance seminar, NBER Behavioral Finance working group meeting, and Stanford Business School finance seminar. Errors and omissions remain our responsibility. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research.

Gruber (1996) finds evidence to support selection ability among active fund investors for equity funds listed in 1982. Using a large sample of equity funds, I find evidence that newly invested money is able to predict future fund performance, in that the equally weighted portfolios of funds that receive more money subsequently perform significantly better than those that lose money. There is no significant evidence that funds that receive more money subsequently beat the market, except for the small funds. There is some evidence that the

2.37. Small trades and the cross-section of stock returns This paper uses volume arising from small trades to analyze the effect of retail investor trading behavior on the cross-section of stock returns. The central finding is that stocks with intense sell-initiated small-trade volume, measured over the past several months, outperform stocks with intense buy-initiated small-trade volume. This return difference accrues from the first month after the portfolio formation up to three years later. The results suggest that stocks favored by retail investors become overvalued and subsequently experience prolonged underperformance relative to stocks out of favor with retail investors. A literature has emerged which finds systematic trading behavior among various investor groups. For instance, individual investors are found to quickly realize gains, but refrain from realizing losses; mutual funds and other institutional investors tend to follow momentum strategies, while individuals tend to be short-term contrarians, but longer-term momentum traders; a strong seasonal component exists to individuals ’ trading behavior; trading frequency by individuals depends on gender; small and large investors respond differently to events such as earnings releases, seasoned equity offerings, and analysts ’ recommendations.