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.
Cite
@article{wardlaw2020measuring,
title = {Measuring Mutual Fund Flow Pressure as Shock to Stock Returns},
author = {Malcolm Wardlaw},
journal = {Journal of Finance},
year = {2020},
doi = {10.1111/jofi.12962}
}