Flow-Induced Trading Pressure and Corporate Investment

51 Pages Posted: 2 Nov 2012 Last revised: 23 May 2016

See all articles by Xiaoxia Lou

Xiaoxia Lou

University of Delaware - Alfred Lerner College of Business and Economics

Yan Albert Wang

Auburn University

Date Written: May 20, 2016

Abstract

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

Lou, Xiaoxia and Wang, Yan Albert, Flow-Induced Trading Pressure and Corporate Investment (May 20, 2016). Available at SSRN: https://ssrn.com/abstract=2169135 or http://dx.doi.org/10.2139/ssrn.2169135

Xiaoxia Lou (Contact Author)

University of Delaware - Alfred Lerner College of Business and Economics ( email )

419 Purnell Hall
Newark, DE 19716
United States

Yan Albert Wang

Auburn University ( email )

315 Lowder Hall
Department of Finance
Auburn, AL 36849
United States

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