Using novel data on global asset managers, this study investigates the asset pricing factors that guide global fund flows. Among the prominent models assessed, the Capital Asset Pricing Model (CAPM) emerges as the most influential in predicting global fund flows. These results are primarily driven by institutional investors, rather than high-net-worth individuals, although all investor types do not seem to use sophisticated benchmarks. The prevalent use of the CAPM leads to correlated demand, which positively predicts stock returns in the short term but reverses in the long term. Our findings suggest that the CAPM remains an important model after all.

Initial purchase positions by skilled fund managers in a firm signal their conviction not only in the firm but also in its industry, making industry valuation more informative. Upon observing these signals, a firm’s sensitivity of investment to industry Q increases by 8.4%. Unskilled fund managers’ signals exhibit insignificant effects, suggesting that the information source matters for learning. The learning process involves intensified searching of other firms’ SEC filings and reallocation of internal resources. After skilled fund managers quickly liquidate their initial positions, corporate investment also reverses. Our findings suggest that the real effects of skilled fund managers’ stock selection extend beyond their portfolio firms.

We examine whether fund managers overestimate carbon risk when they are exposed to local air pollution. We find that air pollution causes managers to underweight firms with high carbon emissions. The effects are more pronounced for less salient scopes of carbon emissions, among managers located in pro-environmental states, and among those likely to be surprised by air pollution—consistent with managers revising their beliefs about climate-transition risk following their exposure to air pollution. Carbon-intensive stocks sold by managers who are exposed to air pollution subsequently outperform those stocks that they buy, suggesting that such underweighting is costly to fund investors.

We study the market reactions following staggered implementations of lockdowns across U.S. states during Covid-19. We find that returns on firms located in lockdown states are higher following the lockdown. We interpret these market reactions as reflecting updated beliefs of market participants in the light of events that follow the lockdowns, such as compliance with stay-at-home orders. The effect is (a) concentrated among counties with a high number of infections, (b) larger for firms in essential industries, and (c) larger for Democratic states. These findings suggest that the market perceives Non-Pharmaceutical Interventions, when effective, to be beneficial for businesses.