Corporate managers, price noise and the investment factor

Abstract This study investigates the impact of flows between bond and equity funds on investment factors over period 1984–2015. It determines contemporaneous mispricing effects a statistical reversal relation these both legs factor. The relationship previous factor is economically significant. A one-standard-deviation shock to causes 0.29% decrease in returns, which are reversed within 5 months. trading strategy based signals from past outperforms market by 0.68% months following positive produces significant alphas after accounting for well-known risk factors. findings interpreted as evidence favor behavioral explanation, sentiment influences actual managerial decisions. When retail investors managers swept up euphoria, shift their holdings mutual funds, high-investment firms invest more aggressively. Market-level euphoria has different high- low-investment firms, thus can be influenced. Hence, occurs during periods, especially pronounced portfolio versus portfolio. As result, periods flows, Interestingly, this study’s measure serves proxy market-level other measures investor sentiment.