Mutual Fund Trading Pressure: Firm-Level Stock Price Impact and Timing of SEOs

Abstract

We use price pressure resulting from purchases by mutual funds with large capital inflows to identify overvalued equity. This is a relatively exogenous overvaluation indicator as it is associated with who is buying – buyers with excess liquidity – rather than what is being purchased. We document substantial stock price impact associated with purchases by high-inflow mutual funds, and find the probability of an SEO, insider sales, and the probability of a stock-based acquisition increase significantly in the four quarters following the mutual fund buying pressure. These results provide new evidence that firm managers are able to identify and exploit overvalued equity.

Keywords: SEO, Market Timing, Price Impact, Trading Pressure, Mutual Fund

JEL Classification: G10, G11, G12, G14, G23, G30, G32