Avoiding Volatility : Institutional Trading Before Scheduled News

The paper studies institutional trading ahead of scheduled information releases, notably earnings announcements. While scheduled news are known to be preceded by sizeable stock returns, we find that institutional investors on average forego part of these premia as they decrease their exposure to the stocks involved in these events. This behavior appears to be motivated by the avoidance of stock-level volatility and extreme downside risk. Although the effect of a single stock holding on fund performance is small, we identify a new friction that motivates institutional behavior. Specifically, strongly negative earnings announcement returns for a single portfolio holding lead to substantially larger outflows. Reducing the exposure to the stock before the announcement mitigates these outflows