Journal of Banking & Finance Vol. 146 2023
Fund flow-induced volatility and the cost of debt
Abstract
Uninformative stock price fluctuations induced by volatile mutual fund flows generate unintended consequences for corporate debt financing. We propose a measure of stock-level passive equity mutual fund flow-induced volatility pressure and find that it positively affects the bond yield spread at issuance through higher perceived risks revealed by increased equity volatility. Although flow-induced volatility is costly to the borrowing firm, in contrast to equity volatility, it has no significant association with future firm fundamental risk. Our study reveals a dark side of passive investing.
- DOI
- 10.1016/j.jbankfin.2022.106702
- Volume
- 146
- Pages
- 106702
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib