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

Abstract

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

Berger, Elizabeth, Selection Bias in Mutual Fund Flow-Induced Fire Sales: Causes and Consequences (March 13, 2019). Available at SSRN: https://ssrn.com/abstract=3011027 or http://dx.doi.org/10.2139/ssrn.3011027

Elizabeth Berger (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

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