Selection Bias in Mutual Fund Flow-Induced Fire Sales: Causes and Consequences
44 Pages Posted: 1 Aug 2017 Last revised: 15 Mar 2019
Date Written: March 13, 2019
I find that after accounting for selection bias, there is no feedback effect between mutual fund flow-induced mispricing and the financial policies of firms (i.e., investment, equity issuance, and payout). Flow-induced stock mispricing is not an exogenous treatment. I begin by replicating prior findings that appear to show that mispricing events cause firms to alter their policies. I then show that selection bias drives this result. Stock mispricing is predicted by past returns and firm characteristics. I propose an empirical method to detect selection bias that also can potentially mitigate its impact on estimates of the feedback effect.
Keywords: Mutual Funds; Stock Prices; Firm Financial Policy
JEL Classification: G14; G23; G32
Suggested Citation: Suggested Citation