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Measuring Mutual Fund Flow Pressure as Shock to Stock Returns

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  • MALCOLM WARDLAW

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 nonfundamental price variation. I demonstrate that the standard approach to computing outflow‐induced price pressure produces a measure that is inadvertently a direct function of a stock's actual realized return during the outflow quarter, raising doubts about its orthogonality to fundamentals. After removing these direct measurements of return, 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.

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  • Malcolm Wardlaw, 2020. "Measuring Mutual Fund Flow Pressure as Shock to Stock Returns," Journal of Finance, American Finance Association, vol. 75(6), pages 3221-3243, December.
    • Handle: RePEc:bla:jfinan:v:75:y:2020:i:6:p:3221-3243
    DOI: 10.1111/jofi.12962
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    2. Massa, Massimo & Cheng, Si & Zhang, Hong, 2021. "Financial Globalization vs. Income Inequality: The Surprising Role of Delegated Portfolio Flows in Taming the Top 1%," CEPR Discussion Papers 15745, C.E.P.R. Discussion Papers.
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    4. Gredil, Oleg R. & Kapadia, Nishad & Lee, Jung Hoon, 2022. "On the information content of credit ratings and market-based measures of default risk," Journal of Financial Economics, Elsevier, vol. 146(1), pages 172-204.
    5. José Miguel Cardoso da Costa & Rui Albuquerque, 2023. "Price elasticity of demand and risk-bearing capacity in sovereign bond auctions," Working Papers w202302, Banco de Portugal, Economics and Research Department.
    6. Doron Israeli & Ron Kaniel & Suhas A. Sridharan, 2022. "The Real Side of the High-Volume Return Premium," Management Science, INFORMS, vol. 68(2), pages 1426-1449, February.
    7. Jiang, Jinglin & Nanda, Vikram & Xiao, Steven Chong, 2021. "Stock-market disruptions and corporate disclosure policies," Journal of Corporate Finance, Elsevier, vol. 66(C).
    8. Amil Dasgupta & Vyacheslav Fos & Zacharias Sautner, 2021. "Institutional Investors and Corporate Governance," Foundations and Trends(R) in Finance, now publishers, vol. 12(4), pages 276-394, September.
    9. Dasgupta, Amil & Fos, Vyacheslav & Sautner, Zacharias, 2021. "Institutional investors and corporate governance," LSE Research Online Documents on Economics 112114, London School of Economics and Political Science, LSE Library.
    10. Broman, Markus S., 2020. "Local demand shocks, excess comovement and return predictability," Journal of Banking & Finance, Elsevier, vol. 119(C).

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