Flow-Induced Trading Pressure and Corporate Investment
51 Pages Posted: 2 Nov 2012 Last revised: 23 May 2016
Date Written: May 20, 2016
The impact of liquidity-motivated institutional trading on firms’ real decisions is not confined to periods of financial crises. 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.
Keywords: Real Effects of Financial Markets; Corporate Investment; Mutual Fund Flow-Induced Trading Pressure
JEL Classification: G31, G32, G23
Suggested Citation: Suggested Citation