Which investors drive anomaly returns and how?

Abstract

We decompose variation in anomaly returns across investor types and trading motives, linking returns to holdings within a demand system. Fundamental-based trading is the primary driver of anomalies, and both this channel and non-fundamental trading are driven disproportionately by small investors. Institution-led channels — flows and industry tilts — are secondary and concentrated in specific anomalies. These patterns favor theories with heterogeneous investors and distinct trading behaviors over pure flow- or risk-only explanations. Small investors account for a large share of the cash-flow news component of fundamentals-based trading, suggesting that biases in processing information play a role in anomaly returns.