Hostname: page-component-76fb5796d-2lccl Total loading time: 0 Render date: 2024-04-26T01:18:34.428Z Has data issue: false hasContentIssue false
  • English
  • Français

Flow-Induced Trading Pressure and Corporate Investment

Published online by Cambridge University Press:  16 January 2018

Xiaoxia Lou  and
Albert Y. Wang
Get access Rights & Permissions [Opens in a new window]

Abstract

The impact of liquidity-motivated institutional trading on firms’ real decisions is not confined to periods of financial crisis. Firms subject to mutual fund flow-driven selling pressure reduce share issuance and investment, whereas firms experiencing buying pressure do not increase investment, although they issue more equity. Firms under extreme selling pressure cut quarterly investment by 0.075 percentage points of total assets, which is 4.3% of the average quarterly investment in our sample. We also find evidence that the effect is not attributed to managerial learning or catering incentives. Rather, flow-driven trading affects investment mainly through its impact on the financing cost.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 1 , February 2018 , pp. 171 - 201
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

We gratefully acknowledge the comments of an anonymous referee, Andrew Ellul, Jonathan Karpoff, Paul Malatesta (the editor), Kelsey Wei, and the discussants and participants at the 2013 China International Conference of Finance and the 2013 Financial Management Association annual meetings. All errors are our own.

References

Ali, A.; Wei, K. D.; and Zhou, Y.. “Insider Trading and Option Grant Timing in Response to Fire Sales (and Purchases) of Stocks by Mutual Funds.” Journal of Accounting Research, 49 (2011), 595–632.CrossRefGoogle Scholar
Almeida, H.; Campello, M.; and Weisbach, M.. “The Cash Flow Sensitivity of Cash.” Journal of Finance, 59 (2004), 1777–1804.CrossRefGoogle Scholar
Almeida, H.; Hsu, P.-H.; and Li, D.. “Less Is More: Financial Constraints and Innovative Efficiency.” Working Paper, University of Illinois (2013).Google Scholar
Baker, M.; Stein, J.; and Wurgler, J.. “When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms.” Quarterly Journal of Economics, 118 (2003), 969–1005.CrossRefGoogle Scholar
Baker, M. P., and Wurgler, J.. “Market Timing and Capital Structure.” Journal of Finance, 57 (2002), 1–32.CrossRefGoogle Scholar
Blanchard, O.; Rhee, C.; and Summers, L.. “The Stock Market, Profit, and Investment.” Quarterly Journal of Economics, 108 (1993), 115–136.Google Scholar
Bond, P.; Edmans, A.; and Goldstein, I.. “The Real Effects of Financial Markets.” Annual Review of Financial Economics, 4 (2012), 339–360.CrossRefGoogle Scholar
Brockman, P., and Yan, X.. “Block Ownership and Firm-Specific Information.” Journal of Banking and Finance, 33 (2009), 308–316.Google Scholar
Campello, M., and Graham, J. R.. “Do Stock Prices Influence Corporate Decisions? Evidence from the Technology Bubble.” Journal of Financial Economics, 107 (2013), 89–110.CrossRefGoogle Scholar
Chen, Q.; Goldstein, I.; and Jiang, W.. “Price Informativeness and Investment Sensitivity to Stock Price.” Review of Financial Studies, 20 (2007), 619–650.Google Scholar
Coval, J., and Stafford, E.. “Asset Fire Sales (and Purchases) in Equity Markets.” Journal of Financial Economics, 86 (2007), 479–512.CrossRefGoogle Scholar
Duchin, R.; Ozbas, O.; and Sensoy, B.. “Costly External Finance, Corporate Investment, and the Subprime Mortgage Credit Crisis.” Journal of Financial Economics, 97 (2010), 418–435.Google Scholar
Edmans, A.; Goldstein, I.; and Jiang, W.. “The Real Effects of Financial Markets: The Impact of Prices on Takeovers.” Journal of Finance, 67 (2012), 933–971.CrossRefGoogle Scholar
Gaspar, J.; Massa, M.; and Matos, P.. “Shareholder Investment Horizons and the Market for Corporate Control.” Journal of Financial Economics, 76 (2005), 135–165.CrossRefGoogle Scholar
Hadlock, C. J., and Pierce, J. R.. “New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index.” Review of Financial Studies, 23 (2010), 1909–1940.Google Scholar
Hau, H., and Lai, S.. “Real Effects of Stock Underpricing.” Journal of Financial Economics, 108 (2013), 392–408.Google Scholar
Jensen, M. C.“Agency Costs of Free Cash Flows, Corporate Finance, and Takeovers.” American Economics Review, 76 (1986), 323–329.Google Scholar
Jensen, M. C.“Agency Costs of Overvalued Equity.” Financial Management, 34 (2005), 5–19.CrossRefGoogle Scholar
Kamara, A.; Korajczyk, R. A.; Lou, X.; and Sadka, R.. “Horizon Pricing.” Journal of Financial and Quantitative Analysis, 51 (2016), 1769–1793.Google Scholar
Kamara, A.; Lou, X.; and Sadka, R.. “The Divergence of Liquidity Commonality in the Cross-Section of Stocks.” Journal of Financial Economics, 89 (2008), 444–466.CrossRefGoogle Scholar
Khan, M.; Kogan, L.; and Serafeim, G.. “Mutual Fund Trading Pressure: Firm-Level Stock Price Impact and Timing of SEOs.” Journal of Finance, 67 (2012), 1371–1395.CrossRefGoogle Scholar
Kim, W., and Weisbach, M.. “Motivations for Public Equity Offers: An International Perspective.” Journal of Financial Economics, 87 (2008), 281–307.Google Scholar
Lou, D.“A Flow-Based Explanation for Return Predictability.” Review of Financial Studies, 25 (2012), 3457–3489.CrossRefGoogle Scholar
Luo, Y.“Do Insiders Learn from Outsiders? Evidence from Mergers and Acquisitions.” Journal of Finance, 60 (2005), 1951–1982.Google Scholar
Morck, R.; Shleifer, A.; and Vishny, R.. “The Stock Market and Investment: Is the Market a Sideshow?” Brookings Papers on Economic Activity, 2 (1990), 157–215.Google Scholar
Morck, R.; Yeung, B.; and Yu, W.. “The Information Content of Stock Markets: Why Do Emerging Markets Have Synchronous Stock Price Movements?” Journal of Financial Economics, 58 (2000), 215–260.Google Scholar
Polk, C., and Sapienza, P.. “The Stock Market and Corporate Investment: A Test of Catering Theory.” Review of Financial Studies, 22 (2009), 187–217.Google Scholar
Pollet, J., and Wilson, M.. “How Does Size Affect Mutual Fund Behavior?” Journal of Finance, 63 (2008), 2941–2969.CrossRefGoogle Scholar
Roll, R.“ R 2 .” Journal of Finance, 43 (1988), 541–566.Google Scholar
Whited, T. M., and Wu, G.. “Financial Constraints Risk.” Review of Financial Studies, 19 (2006), 531–555.Google Scholar