Fund flow-induced volatility and the cost of debt

Douglas O. Cook and Luo, Shikong (Scott)

Journal of Banking & Finance, 2023, vol. 146, issue C

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.

Keywords: Non-fundamental risk; Cost of debt; Mutual fund flow volatility; Passive investments (search for similar items in EconPapers)
JEL-codes: G10 G30 G40 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:146:y:2023:i:c:s0378426622002825

DOI: 10.1016/j.jbankfin.2022.106702

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