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Flow-Induced Trading Pressure and Corporate Investment

Published online by Cambridge University Press:  16 January 2018

Xiaoxia Lou  and
Albert Y. Wang
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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 

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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.

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