Professor Franceso Franzoni will present the paper ''Avoiding Idiosyncratic Volatility: Flow Sensitivity toIndividual Stock Returns''
Despite positive and significant earnings announcement premia, we find that institu-tional investors reduce their exposure to stocks before earnings announcements. Anovel result on the sensitivity of flows to individual stock returns provides a potentialexplanation. We show that extreme announcement returns for an individual holdinglead to substantial outflows, controlling for overall performance, and they increase theprobability of managers leaving the fund. Reducing the exposure to these stocks beforethe announcement mitigates the outflows. We build a model to describe and quantifythis tradeoff. Overall, the paper identifies a new dimension of limits to arbitrage for institutions.