Mutual Fund Flows and Seasonalities in Stock Returns

We propose a flow-based explanation for two long-standing anomalies in empirical finance – the Sell in May effect and the January effect. We find that the aggregate mutual fund flows exhibit similar seasonal patterns as stock returns. The Sell in May effect becomes insignificant in standard statistical tests after controlling for the impact of mutual fund flows on returns, with flow explaining about 54% of the variation in excess returns over the winter months. We also find that flow helps explaining the abnormally high returns of small-cap stocks in January. The Sell in May and January effects appear to be primarily a retail money effect. Similarly, the well-known co-movement between flow and market return is only present in retail fund flow. Overall, the evidence suggests that unanticipated rather than expected flow drives our results.