Journal of Finance Vol. 75 No. 6 2020
Measuring Mutual Fund Flow Pressure as Shock to Stock Returns
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.
- DOI
- 10.1111/jofi.12962
- Volume
- 75
- Issue
- 6
- Pages
- 3221-3243
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref