Revisiting the Real Effects of Mutual Fund Fire Sales

Abstract

We revisit the real effects of stock markets using mutual funds’ fire sales. Using European data and Wardlaw (2020)’s flow-to-stock measure, we show that fire sales trigger a significant price reduction, followed by a reversal. We also show that fire sales lead to an increased probability of takeovers. Exploiting cross-country variation, we show that our results are driven by the interaction of lower liquidity and heightened fire sale intensity.

Keywords: Mutual fund fire sales, market frictions, price pressures, M&A