Abstract
This paper investigates the effect of one specific measure of the global demand for local stocks, U.S. investors’ net flows, on firm-level stock returns. I document that stocks with lower sensitivity to U.S. investors’ net flows (NFL) earn significantly higher returns. The negative association is not subsumed by standard characteristics associated with mispricing, price-pressures, difference of opinion, or firm-level foreign operations, and is relatively easy to exploit. Consistent with global flows amplifying the demand for local stocks, I present reliable evidence that the return to an NFL factor-mimicking portfolio is predictable and concentrated in periods that follow reduced uncertainty and sentiment.
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