Measuring Mutual Fund Flow Pressure as Shock to Stock Returns
Corresponding Author
MALCOLM WARDLAW
Malcolm Wardlaw is with University of Georgia, Terry School of Business. Special thanks to Elizabeth Berger, Nicholas Crain, Jonathan Cohn, Alex Edmans, Itay Goldstein, Wei Jiang, Uday Rajan, Breno Schmidt, Sheridan Titman, Wei Wei, Toni Whited, Steven Xiao, and Alex Young for comments and suggestions. Thanks also to seminar participants at the University of Michigan, University of Illinois at Chicago, University of Warwick, University of South Carolina, University of Georgia, Chinese University of Hong Kong, University of New South Wales, the 2019 Midwest Finance Association, and the 2019 Western Finance Association annual meetings. The author has no conflicts of interest as identified by The Journal of Finance's disclosure policy.
Correspondence: Malcolm Wardlaw, Terry School of Business, University of Georgia, 620 South Lumpkin Street, B332 Amos Hall, Athens, GA 30602; telephone: (706) 542-0356;
e-mail: malcolm.wardlaw@uga.edu.
Search for more papers by this authorCorresponding Author
MALCOLM WARDLAW
Malcolm Wardlaw is with University of Georgia, Terry School of Business. Special thanks to Elizabeth Berger, Nicholas Crain, Jonathan Cohn, Alex Edmans, Itay Goldstein, Wei Jiang, Uday Rajan, Breno Schmidt, Sheridan Titman, Wei Wei, Toni Whited, Steven Xiao, and Alex Young for comments and suggestions. Thanks also to seminar participants at the University of Michigan, University of Illinois at Chicago, University of Warwick, University of South Carolina, University of Georgia, Chinese University of Hong Kong, University of New South Wales, the 2019 Midwest Finance Association, and the 2019 Western Finance Association annual meetings. The author has no conflicts of interest as identified by The Journal of Finance's disclosure policy.
Correspondence: Malcolm Wardlaw, Terry School of Business, University of Georgia, 620 South Lumpkin Street, B332 Amos Hall, Athens, GA 30602; telephone: (706) 542-0356;
e-mail: malcolm.wardlaw@uga.edu.
Search for more papers by this authorABSTRACT
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.
Supporting Information
| Filename | Description |
|---|---|
| jofi12962-sup-0001-OnlineAppendix.pdf290 KB | Appendix S1: Internet Appendix. |
| jofi12962-sup-0002-ReplicationCode.zip3.6 MB | Replication code. |
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