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Measuring Mutual Fund Flow Pressure as Shock to Stock Returns

Author

Listed:
  • 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.

Suggested Citation

  • 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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    References listed on IDEAS

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