Hostname: page-component-84b7d79bbc-lrf7s Total loading time: 0 Render date: 2024-07-25T12:30:30.608Z Has data issue: false hasContentIssue false
  • English
  • Français

Cash Induced Demand

Published online by Cambridge University Press:  12 December 2022

Huaizhi Chen Open the ORCID record for Huaizhi Chen [Opens in a new window]
Huaizhi Chen*
Affiliation:
University of Notre Dame Mendoza College of Business
*
hchen11@nd.edu
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

I show that cash distributions through cash mergers, dividend payments, and stock buybacks are, in principle, similar to investor fund flows in generating demand for investable assets. Abnormal returns on certain assets can be forecasted because delegated investors predictably reinvest cash returns toward certain holdings. Novel measures of stock-level demand constructed using proportional reinvestments by mutual funds predict abnormal returns and issuances in noncash-paying stocks. These results highlight an alternative and substantial source of price fluctuations in the cross section of equities.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 1 , February 2024 , pp. 195 - 220
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

I thank Malcolm Baker, Robert Battalio, Susan Christoffersen, Lauren Cohen, Zhi Da, Paul Gao, Robin Greenwood, Shiyang Huang, Markus Ibert, Dong Lou, Tim Loughran, Christopher Malloy, Christopher Polk, Sophie Shive, Andrei Shleifer, Erik Stafford, René Stulz, and Luis Viceira for their valuable comments and suggestions. I thank the participants at AFA 2019, American University, AQR Capital Management, the FMA Asia Conference, Northeastern University, Ohio State University, the University of Delaware, the 2018 Southern Finance Association Conference, 2019 Midwest Finance Association Conference, and the University of Notre Dame for their valuable input. I also thank an anonymous referee and the editor for their substantial contributions. A large part of this research was conducted during my post-doctoral fellowship supported by the Behavioral Finance and Financial Stability Initiative at Harvard Business School. This article was previously circulated as “Capital Redeployment in the Equity Market.”

References

Baker, M., and Wurgler, J.. “The Equity Share in New Issues and Aggregate Stock.” Journal of Finance, 55 (2000), 2219–2257.CrossRefGoogle Scholar
Barberis, N., and Shleifer, A.. “Style Investing.” Journal of Financial Economics, 68 (2003), 161–199.CrossRefGoogle Scholar
Bhattacharya, S. “Imperfect Information, Dividend Policy, and ‘The Bird in the Hand’ Fallacy.” Bell Journal of Economics, 10 (1979), 259–270.CrossRefGoogle Scholar
Boyer, B. H. “Style-Related Comovement: Fundamentals or Labels?” Journal of Finance, 66 (2011), 307–332.CrossRefGoogle Scholar
Brown, S. J., and Goetzmann, W. N.. “Mutual Fund Styles.” Journal of Financial Economics, 43 (1997), 373–399.CrossRefGoogle Scholar
Chernenko, S., and Sunderam, A.. “Do Fire Sales Create Externalities?” Journal of Financial Economics, 135 (2019), 602–628.CrossRefGoogle Scholar
Choi, J.; Hoseinzade, S.; Shin, S. S.; and Tehranian, H.. “Corporate Bond Mutual Funds and Asset Fire Sales.” Journal of Financial Economics, 138 (2020), 432–457.CrossRefGoogle Scholar
Cook, D. O.; Krigman, L.; and Leach, C. J.. “On the Timing and Execution of Open Market Repurchases.” Review of Financial Studies, 17 (2004), 463–498.CrossRefGoogle Scholar
Coval, J., and Stafford, E.. “Asset Fire Sales (and Purchases) in Equity Markets.” Journal of Financial Economics, 86 (2007), 479–512.CrossRefGoogle Scholar
Cremers, M., and Petajisto, A.. “How Active Is Your Fund Manager? A New Measure That Predicts Performance.” Review of Financial Studies, 22 (2009), 3329–3365.CrossRefGoogle Scholar
Di Maggio, M.; Kermani, A.; and Majlesi, K.. “Stock Market Returns and Consumption.” Journal of Finance, 75 (2020), 3175–3219.CrossRefGoogle Scholar
Dittmar, A., and Field, L. C.. “Can Managers Time the Market? Evidence Using Repurchase Price Data.” Journal of Financial Economics, 115 (2015), 261–282.CrossRefGoogle Scholar
Edmans, A.; Goldstein, I., and Jiang, W.. “The Real Effects of Financial Markets: Impact of Prices on Takeovers.” Journal of Finance, 67 (2012), 933–971.CrossRefGoogle Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.CrossRefGoogle Scholar
Frazzini, A., and Lamont, O. A.. “Dumb Money: Mutual Fund Flows and the Cross-Section of Stock Returns.” Journal of Financial Economics, 88 (2008), 299–322.CrossRefGoogle Scholar
Gabaix, X., and Koijen, R.. “In Search of the Origins of Financial Fluctuations: The Inelastic Markets Hypothesis.” NBER Working Paper No. w28967 (2020).CrossRefGoogle Scholar
Graham, J., and Harvey, C.. “How Do CFOs Make Capital Budgeting and Capital Structure Decisions?” Journal of Applied Corporate Finance, 15 (2002), 8–23.CrossRefGoogle Scholar
Greenwood, R. “Short- and Long-Term Demand Curves for Stocks: Theory and Evidence on the Dynamics of Arbitrage.” Journal of Financial Economics, 75 (2005), 607–649.CrossRefGoogle Scholar
Greenwood, R., and Hanson, S. G.. “Share Issuance and Factor Timing.” Journal of Finance, 67 (2012), 761–798.CrossRefGoogle Scholar
Grullon, G., and Michaely, R.. “Dividends, Share Repurchases, and the Substitution Hypothesis.” Journal of Finance, 57 (2002), 1649–1684.CrossRefGoogle Scholar
Harris, L., and Gurel, E.. “Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures.” Journal of Finance, 41 (1986), 815–829.CrossRefGoogle Scholar
Hartzmark, S. M., and Solomon, D. H.. “The Dividend Disconnect.” Journal of Finance, 74 (2019), 2153–2199.CrossRefGoogle Scholar
Hong, H.; Wang, J.; and Yu, J.. “Firms as Buyers of Last Resort.” Journal of Financial Economics, 88 (2008), 119–145.CrossRefGoogle Scholar
Hu, G.; Jo, K. M.; Wang, Y. A.; and Xie, J.. “Institutional Trading and Abel Noser Data.” Journal of Corporate Finance, 52 (2018), 143–167.CrossRefGoogle Scholar
Ikenberry, D.; Lakonishok, J.; and Vermaelen, T.. “Market Underreaction to Open Market Share Repurchases.” Journal of Financial Economics, 39 (1995), 181–208.CrossRefGoogle Scholar
Jagannathan, M.; Stephens, C. P.; and Weisbach, M.. “Financial Flexibility and the Choice Between Dividends and Stock Repurchases.” Journal of Financial Economics, 57 (2000), 355–384.CrossRefGoogle Scholar
Jegadeesh, N., and Titman, S.. “Returns to Buying Winners and Selling Losers: Implications for Stock Market.” Journal of Finance, 48 (1993), 65–91.CrossRefGoogle Scholar
Kahle, K. M. “When a Buyback Isn’t a Buyback: Open Market Repurchases and Employee Options.” Journal of Financial Economics, 63 (2002), 235–261.CrossRefGoogle Scholar
Kahn, 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
Kaul, A.; Mehrotra, V.; and Morck, R.. “Demand Curves for Stocks Do Slope Down: New Evidence from an Index Weights Adjustment.” Journal of Finance, 55 (2002), 893–912.CrossRefGoogle Scholar
Lou, D. “A Flow-Based Explanation for Return Predictability.” Review of Financial Studies, 25 (2012), 3457–3489.CrossRefGoogle Scholar
Loughran, T., and Ritter, J. R.. “The New Issues Puzzle.” Journal of Finance, 50 (1995), 23–51.CrossRefGoogle Scholar
Massa, M.; Rehman, Z.; and Vermaelen, T.. “Mimicking Repurchases.” Journal of Financial Economics, 84 (2007), 624–666.CrossRefGoogle Scholar
Miller, M. H., and Modigliani, F.. “Dividend Policy, Growth, and the Valuation of Shares.” Journal of Business, 34 (1961), 411–433.CrossRefGoogle Scholar
Mitchell, M.; Pulvino, T.; and Stafford, E.. “Price Pressure around Mergers.” Journal of Finance, 59 (2004), 31–63.CrossRefGoogle Scholar
Petajisto, A. “Active Share and Mutual Fund Performance.” Financial Analysts Journal, 69 (2013), 73–93.CrossRefGoogle Scholar
Puckett, A., and Yan, X.. “The Interim Trading Skills of Institutional Investors.” Journal of Finance, 66 (2011), 601–633.CrossRefGoogle Scholar
Shleifer, A. “Do Demand Curves for Stocks Slope Down?” Journal of Finance, 41 (1986), 579–590.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R. W.. “Liquidation Values and Debt Capacity: A Market Equilibrium Approach.” Journal of Finance, 47 (1992), 1343–1366.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R. W.. “The Limits of Arbitrage.” Journal of Finance, 52 (1997), 35–55.CrossRefGoogle Scholar
Stephens, C. P., and Weisbach, M. S.. “Actual Share Reacquisitions in Open‐Market Repurchase Programs.” Journal of Finance, 53 (2002), 313–333.CrossRefGoogle Scholar
Vermaelen, T. “Common Stock Repurchases and Market Signaling: An Empirical Study.” Journal of Financial Economics, 9 (1981), 139–183.CrossRefGoogle Scholar
Wardlaw, M. “Measuring Mutual Fund Flow Pressure as Shock to Stock Returns.” Journal of Finance, 75 (2020), 3221–3243.CrossRefGoogle Scholar
Warther, V. A. “Aggregate Mutual Fund Flows and Security Returns.” Journal of Financial Economics, 39 (1995), 209–235.CrossRefGoogle Scholar
Supplementary material: PDF

Chen supplementary material

Chen supplementary material

Download Chen supplementary material(PDF)
PDF 328.7 KB