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Redemption in Kind and Mutual Fund Liquidity Management

Author

Listed:
  • Vikas Agarwal
  • Honglin Ren
  • Ke Shen
  • Haibei Zhao

Abstract

Open-end mutual funds can use redemption in kind to satisfy investor redemptions by delivering securities instead of cash. We find that funds that reserve their rights to redeem in kind experience less redemption after poor performance. Evidence from actual in-kind transactions reveals several unique mechanisms for redemption in kind to mitigate fund runs, including the delivery of more illiquid stocks and stocks with greater tax overhang. Funds suffer less from the adverse impact of outflows on their performance. However, redeeming investors bear significant liquidation costs when they sell securities, costs associated with destabilization in the prices of these securities.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Vikas Agarwal & Honglin Ren & Ke Shen & Haibei Zhao, 2023. "Redemption in Kind and Mutual Fund Liquidity Management," The Review of Financial Studies, Society for Financial Studies, vol. 36(6), pages 2274-2318.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:6:p:2274-2318.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhac080
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    Cited by:

    1. Aragon, George O. & Kim, Min S., 2023. "Fire sale risk and expected stock returns," Journal of Financial Economics, Elsevier, vol. 149(3), pages 578-609.

    More about this item

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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