Measuring Mutual Fund Flow Pressure As Shock to Stock Returns

39 Pages Posted: 22 Sep 2018 Last revised: 12 Nov 2018

See all articles by Malcolm Wardlaw

Malcolm Wardlaw

University of Michigan, Stephen M. Ross School of Business; University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Date Written: October 12, 2018

Abstract

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

Wardlaw, Malcolm, Measuring Mutual Fund Flow Pressure As Shock to Stock Returns (October 12, 2018). Available at SSRN: https://ssrn.com/abstract=3248750 or http://dx.doi.org/10.2139/ssrn.3248750

Malcolm Wardlaw (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States
972-883-5903 (Phone)

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