Measuring Mutual Fund Flow Pressure As Shock to Stock Returns
38 Pages Posted: 22 Sep 2018 Last revised: 29 Jan 2019
Date Written: October 12, 2018
A large and rapidly growing literature examines the impact of misvaluation on firm policies by using mutual fund outflow-induced price pressure to isolate non-fundamental price variation. I demonstrate that the standard approach to computing outflow-induced price pressure produces a measure that is inadvertently a direct mechanical function of a stock’s actual realized return during the outflow quarter, raising doubts about its orthogonality to fundamentals. After removing this direct return component, outflows generate a fairly negligible quarterly decline in returns, with no subsequent reversal, and many established results in this literature no longer hold. I provide suggestions for future analysis.
Keywords: mutual funds, fire sales, behavioral finance, corporate policy, instrumental variables
JEL Classification: G23, G34, G31, G30, G14
Suggested Citation: Suggested Citation