Faculty & Research

Juhani Linnainmaa

Associate Professor of Finance and PCL Scholar

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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."


2015 - 2016 Course Schedule

Number Name Quarter
35000 Investments 2016 (Winter)

Other Interests



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: Average Returns, Book-to-Market, and Changes in Firm Size
Date Posted: Apr  07, 2016
Only those high B/M firms that have decreased in size earn the value premium. These firms follow conservative investment policies, while those high B/M firms that do not earn the value premium generate low cash flows. This difference explains why HML is redundant in some asset pricing models include profitability and investment factors, but not others. Profitability and investment factors subsume HML's ability to predict economic growth, implying that expected growth is high when profitable firms that invest conservatively earn high returns. Our result on the relation between the value premium and changes in firm size provides a testable restriction for theories of value: if a value premium within the model remains when controlling for changes in firm size, such a model is inconsistent with the data.

New: Asset Manager Funds
Date Posted: Feb  17, 2016
Institutional investors paid asset managers average annual fees of $172 billion between 2000 and 2012. We show that asset managers outperformed their benchmarks by 96 basis points per year before fees, and by 49 basis points after fees. Estimates from a Sharpe (1992) model suggest that asset managers achieved outperformance through factor exposures ("smart beta"). If institutions had instead implemented a long-only mean-variance efficient portfolio over the same factors via institutional mutual funds, they would have earned just as a high, but no higher, Sharpe ratio as by delegating to asset managers. Liquid, low-cost ETFs are likely eroding the comparative advantage of asset managers. Because asset managers account for 29% of investable assets, the adding-up constraint implies that the average dollar of everyone else had a negative alpha of 49 basis points.

REVISION: Deflating Profitability
Date Posted: Dec  12, 2015
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. Deflating profit by the book value of total assets results in a variable that is the product of profitability and 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 ...

REVISION: Retail Financial Advice: Does One Size Fit All?
Date Posted: Dec  12, 2015
Using unique data on Canadian households, we show that financial advisors exert substantial influence over their clients' asset allocation, but provide limited customization. Advisor fixed effects explain considerably more variation in portfolio risk and home bias than a broad set of investor attributes that includes risk tolerance, stage in the lifecycle and financial sophistication. Advisor effects retain their importance even when controlling flexibly for unobserved heterogeneity through investor fixed effects. An advisor's own asset allocation strongly predicts the allocations chosen on clients' behalf. This one-size-fits-all advice does not come cheap. Advised portfolios cost 2.6% per year, or 1.6% more than lifecycle funds.

REVISION: Return Seasonalities
Date Posted: Dec  12, 2015
A strategy that selects stocks based on their historical same-calendar-month returns earns an average return of 13% per year. We document similar return seasonalities in anomalies, commodities, international stock market indices, and at the daily frequency. The seasonalities overwhelm unconditional differences in expected returns. The correlations between different seasonality strategies are modest, suggesting that they emanate from different systematic factors. Our results suggest that seasonalities are not a distinct class of anomalies that requires an explanation of its own – rather, they are intertwined with other return anomalies through shared systematic factors. A theory that is able to explain the risks behind any systematic factor is thus likely able to explain a part of the seasonalities.

REVISION: Accruals, Cash Flows, and Operating Profitability in the Cross Section of Stock Returns
Date Posted: Sep  21, 2015
Accruals are the non-cash component of earnings. They represent adjustments made to cash flows to generate a profit measure largely unaffected by the timing of receipts and payments of cash. Prior research uncovers two anomalies: expected returns increase in profitability and decrease in accruals. We show that cash-based operating profitability (a measure that excludes accruals) outperforms measures of profitability that include accruals. Further, cash-based operating profitability subsumes accruals in predicting the cross section of average returns. An investor can increase a strategy's Sharpe ratio more by adding just a cash-based operating profitability factor to the investment opportunity set than by adding both an accruals factor and a profitability factor that includes accruals.

REVISION: Reading the Tea Leaves: Model Uncertainty, Robust Forecasts, and the Autocorrelation of Analysts' Forecast Errors
Date Posted: Aug  11, 2015
We put forward a model in which analysts are uncertain about a firm's earnings process. Faced with the possibility of using a misspecified model, analysts issue forecasts that are robust to model misspecification. We estimate that this mechanism explains approximately 60% of the autocorrelation in analysts' forecast errors. The remainder stems from the cross-sectional variation in mean forecast errors and in analysts' estimation errors of the persistence of earnings growth shocks. Consistent with our model, we find that analysts learn about some features of the earnings process but not others, and this learning reduces, but does not eliminate, the auto- correlation of forecast errors as firms age. Other potential explanations for the autocorrelation of analyst's forecast errors are rejected. Our model of robust forecasting applies not only to analysts' forecasts but to all model-based forecasts.

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: 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: 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

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