Measuring Mutual Fund Flow Pressure as Shock to Stock Returns

Malcolm Wardlaw

Journal of Finance, 2020, vol. 75, issue 6, 3221-3243

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.

Date: 2020
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https://doi.org/10.1111/jofi.12962

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