Faculty & Research

Juhani Linnainmaa

Associate Professor of Finance

Phone :
1-773-834-3176
Address :
5807 South Woodlawn Avenue
Chicago, IL 60637

Juhani Linnainmaa studies investor behavior, asset pricing models and portfolio choice, and mutual fund performance. His published research includes “Do limit orders alter inferences about investor performance and behavior?” and “Reverse survivorship bias,” which appeared in the Journal of Finance and “Do investors buy what they know? Product market choices and investment decisions,” which appeared in the Review of Financial Studies.

Linnainmaa earned his master’s degree and bachelor’s degree in finance from Helsinki School of Economics in 2001. He received a PhD in management from the Anderson School at the University of California Los Angeles in 2006. Linnainmaa joined the Chicago Booth faculty in 2006. "I became interested in behavioral finance when I was an undergraduate," Linnainmaa says. "I took a closer look at this literature. Based on the evidence we have, should we really be that quick to reject all notions of rationality and market efficiency? An interest in these questions in turn led me to study performance evaluation and asset pricing models."

 

2014 - 2015 Course Schedule

Number Name Quarter
35000 Investments 2015 (Winter)

Other Interests

Golf

 

Research Activities

Learning; investor behavior; asset pricing models and portfolio choice; and mutual fund performance.

"Do Limit Orders Alter Inferences about Investor Performance and Behavior?," Journal of Finance (2010).

With Mark Grinblatt, "Jensen's Inequality, Parameter Uncertainty, and Multi-period Investments," Review of Asset Pricing Studies (2011).

"Why Do (Some) Households Trade So Much?" Review of Financial Studies (2011).

With Mark Grinblatt and Matti Keloharju, "IQ and Stock Market Participation," Journal of Finance (2011).

With Mark Grinblatt and Matti Keloharju, "IQ, Trading Behavior, and Performance," Journal of Financial Economics (2012).

With Gideon Saar, “Lack of Anonymity and the Inference from Order Flow,” Review of Financial Studies (2012).

With Matti Keloharju and Samuli Knüpfer, "Do Investors Buy What They Know? Product Market Choices and Investment Decisions," Review of Financial Studies (2012).

“Reverse Survivorship Bias,” Journal of Finance (2013).

For a listing of research publications please visit ’s university library listing page.

REVISION: Deflating Profitability
Date Posted: Aug  15, 2014
Gross profit scaled by book value of total assets predicts the cross-section of average returns. Novy-Marx (2013) concludes that it outperforms other measures of profitability such as bottom-line net income, cash flows, and dividends. One potential explanation for the measure's predictive ability is that its numerator - gross profit - is a "cleaner" measure of economic profitability. An alternative explanation lies in the measure's deflator. We find that net income equals gross profit in predictive power when they have consistent deflators. We show that deflating profit by the book value of total assets interacts profitability with the ratio of the market value of equity to the book value of total assets, which is priced. We then construct an alternative measure of profitability, operating profitability, which better matches current expenses with current revenue. This measure exhibits a far stronger link with expected returns than either net income or gross profit. It predicts ...

REVISION: Market Reactions to Tangible and Intangible Information Revisited
Date Posted: Aug  08, 2014
Daniel and Titman (2006) propose that the value premium is due to investors overreacting to in- tangible information. They therefore decompose five-year changes in firms' book-to-market ratios into stock returns and a residual that is a proxy for tangible information based on accounting performance ("book returns"). Consistent with investors overreacting to intangible information, they find that only stock returns orthogonal to book returns reverse. We show that their decomposition creates a book return polluted by past book-to-market ratios, stock returns, net issuances, and dividends. Empirically, two-fifths of the variation in book returns is due to these factors. In addition, the Daniel and Titman (2006) result is sensitive to methodological choices. When we use the change in the book value of equity as a proxy for tangible information, only the tangible component of stock returns reverses. Moreover, current book-to-market subsumes the intangible return's power to predict the ...

REVISION: Dissecting Factors
Date Posted: Jan  21, 2014
Size and book-to-market split into two components, one correlated with changes in market value and the other with everything else. Only the market value components have positive risk premia. Average returns are flat across portfolios based on the other parts, but their loadings on SMB and HML differ significantly. This mismatch between covariances and average returns generates significant alphas for high-minus-low portfolios. The estimated fraction of skilled fund managers increases from 4% to 18% when we control for the other parts. Also, the other part of value drives the negative correlation between gross profitability and value.

REVISION: Common Factors in Stock Market Seasonalities
Date Posted: Oct  26, 2013
A strategy that selects stocks based on their historical same-calendar month returns earns an average return of 13% per year. We develop and test two models to evaluate the source of these profits. In the first model the seasonalities arise from seasonal variation in the risk premia of common factors; in the second they are stock-specific. Our empirical results are consistent with the first model: common factors account for at least three-quarters of the seasonalities in individual stock returns, exposing seasonal investment strategies to systematic risk. The factors are largely the same as those driving the differences in average returns.

REVISION: Do Investors Buy What They Know? Product Market Choices and Investment Decisions
Date Posted: Mar  24, 2012
This paper shows individuals’ product market choices influence their investment decisions. Using microdata from the brokerage and automotive industries, we find a strong positive relation between customer relationship, ownership of a company, and size of the ownership stake. Investors also are more likely to purchase and less likely to sell shares of companies they frequent as customers. These effects are stronger for individuals with longer customer relationships. A merger-based natural experim

REVISION: Reverse Survivorship Bias
Date Posted: Nov  17, 2011
Mutual funds often disappear following poor performance. When this poor performance is partly attributable to negative idiosyncratic shocks, funds' estimated alphas understate their true alphas. This paper estimates a structural model to correct for this bias. Although most funds still have negative alphas, they are not nearly as low as those suggested by the fund-by-fund regressions. Approximately 12% of funds have net four-factor model alphas greater than 2% per year. All studies that run fund

REVISION: Lack of Anonymity and the Inference from Order Flow
Date Posted: Oct  17, 2011
This paper investigates the information content of signals about the identity of investors and whether they affect price formation. We use a dataset from Finland that combines information about the identity of investors with complete order flow records. While we document that investors use multiple brokers, our study demonstrates that broker identity can nonetheless be used as a powerful signal about the identity of investors who initiate trades. This finding testifies to the existence of fricti

REVISION: IQ and Stock Market Participation
Date Posted: Jan  23, 2011
Stock market participation is monotonically related to IQ, controlling for wealth, income, age, and other demographic and occupational information. The high correlation between IQ, measured early in adult life, and participation, exists even among the affluent. Supplemental data from siblings, studied with an instrumental variables approach and regressions that control for family effects, demonstrate that IQ’s influence on participation extends to females and does not arise from omitted familial

REVISION: Reading the Tea Leaves: Why Serial Correlation Patterns in Analysts' Forecast Errors are not Evidenc
Date Posted: Dec  22, 2010
This paper argues that an absence of serial correlation in forecast errors is not the appropriate benchmark for rational analyst behavior. We put forward a model that confronts analysts with two layers of uncertainty. An initial layer of uncertainty about firm-specific parameters leads analysts to underreact to signals from some firms and overreact to signals from others. A subsequent layer of uncertainty about the distributions from which these firm-specific parameters are drawn causes the null

REVISION: Jensen's Inequality, Parameter Uncertainty, and Multi-Period Investment
Date Posted: Nov  02, 2010
Classical approaches to estimation and decisions requiring estimation often are at odds. When values critical to the decision are convex or concave functions of unknown parameters, the statistician’s estimation error adjustments are the opposite of what is appropriate for the decision. We illustrate the conflict by studying multi-period investment problems. The proper application of Jensen’s inequality to the decision turns finance intuition on its head. For example, multi-period investments wit

REVISION: Do Limit Orders Alter Inferences About Investor Performance and Behavior?
Date Posted: Feb  09, 2010
Individual investors lose money around earnings announcements, experience poor post-trade returns, exhibit the disposition effect, and make contrarian trades. Using simulations and trading records of all individuals in Finland, I find that investors’ use of limit orders is largely responsible for these trading patterns. These patterns arise mechanically because limit orders are price-contingent and face the adverse selection problem. Reverse causality from behavioral biases to order choices does

The Anatomy of Day Traders
Date Posted: Dec  08, 2003
This paper examines the complete trading records of all day traders in Finland. A typical day trader is a male in his late 30s, who lives in the metropolitan area and trades in larger quantities than an investor in a size-matched control group even after ignoring day trades. These traders day-trade stocks that grab their attention, that they own, or that they have day-traded before. They pay close attention to the state of the limit order book, are very active near the end of the trading session

For more information on forthcoming work, please visit:

faculty.chicagobooth.edu/juhani.linnainmaa/