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|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|12725||2007||34 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Financial Economics, Volume 86, Issue 2, November 2007, Pages 479–512
This paper examines institutional price pressure in equity markets by studying mutual fund transactions caused by capital flows from 1980 to 2004. Funds experiencing large outflows tend to decrease existing positions, which creates price pressure in the securities held in common by distressed funds. Similarly, the tendency among funds experiencing large inflows to expand existing positions creates positive price pressure in overlapping holdings. Investors who trade against constrained mutual funds earn significant returns for providing liquidity. In addition, future flow-driven transactions are predictable, creating an incentive to front-run the anticipated forced trades by funds experiencing extreme capital flows.
This paper investigates the costs of asset fire sales in equity markets. Financial distress is costly whenever a firm's past financing decisions interfere with current operations. This can arise when capital providers force a firm to quickly sell specialized assets. Because the sale is immediate, the liquidity premium can be large, resulting in transaction prices that are substantially below their fundamental values. The high liquidity of equity markets prompts many firms that specialize in equity investing to be willing to allow capital providers to withdraw their capital on demand. Nonetheless, equity market are not perfectly liquid, and evidence presented in this paper suggests that even in the most liquid of markets, assets sometimes sell at fire sale prices. Shleifer and Vishny (1992) analyze the equilibrium aspect of asset sales and describe how liquidity can disappear, making it very costly for someone who is forced to sell. They essentially argue that asset fire sales are possible when financial distress clusters through time at the industry level and firms within an industry have specialized assets. When a firm must sell assets because of financial distress, the potential buyers with the highest valuation for the specialized asset are other firms in the same industry, who are likely to be in a similarly dire financial situation and therefore will be unable to supply liquidity. Instead, liquidity comes from industry outsiders, who have lower valuations for specialized assets, and thus bid lower prices. This story can easily be recast in a capital market setting. Here, the firms are professional investors, who follow somewhat specialized investment strategies. In this context, specialization refers to concentrated positions in securities that have limited breadth of ownership and, importantly, have significant overlap with others following a similar strategy. For example, merger arbitrage is a specialized investment strategy followed by many professional investors, requiring relatively large positions in stocks that eventually are held mainly by merger arbitrageurs. Specialization is common in investment management, with many professional investors focusing on a single or limited number of investment strategies. Merton (1987) and Shleifer and Vishny (1997) present models of investment management that rely on specialization to derive limited arbitrage. Accurate assessment of asset fire sale costs requires considerable transparency in the decisions of the firm and its investors, whereas most settings in which asset fire sales are costly are likely to be highly opaque. The primary challenge in measuring the costs of asset fire sales is that distinguishing financial from economic distress requires identifying asset sales that are a direct consequence of the financing decisions of the firm. In many corporate settings, financial difficulties and economic difficulties coincide over multi-year periods, making causality difficult to assign. Additionally, efficient estimation of costs requires precise measurement of fair asset value, which can be a challenge in environments characterized by illiquidity and declining prices. The focus of this paper is on the assets held by open-ended mutual funds. The open-ended mutual fund structure produces a highly transparent firm with investment decisions that are easy to identify and monitor. The open-ended mutual fund is also extremely reliant on outside capital to fund its investment opportunities—only the occasional back-end load stands between outside capital providers and their capital. When capital is immediately demandable, a poorly performing mutual fund without significant cash reserves has no choice but to sell holdings quickly. Regulations and self-imposed constraints effectively prevent mutual funds from raising funds by short selling other securities (Almazan, Brown, Carlson, and Chapman, 2004), and binding margin constraints are likely to restrict short selling by severely underperforming hedge funds. Monthly reporting of total net assets allows real-time measurement of the pressures that outside capital providers place on the firm. Moreover, because of high trading frequency in public markets, deviations in transaction prices from fair values can be accurately assessed via the tracking of post-sale returns. On the other hand, the stock market environment is a relatively hospitable one for asset sales. With high transaction volumes and low execution costs, a distressed seller of a listed equity might expect to find many willing buyers. In addition, mutual funds that select the open-ended organizational form do so precisely because they view the potential costs of this structure to be low.1 Thus, our focus is on a setting where asset fire sales are unlikely, but where high transparency permits them to be properly detected should they occur.2 The asset fire sale story is similar to the price pressure hypothesis of Scholes (1972), where stock prices can diverge from their information-efficient values because of uninformed shocks to excess demand to compensate those who provide liquidity. Although a variety of evidence exists in support of the price pressure hypothesis,3 the documented effects rarely last for more than several days. The asset fire sale story identifies forced selling by distressed mutual funds as one particular type of uninformed shock, explains why those who provide liquidity are likely to demand additional compensation, and accounts for why the supply of liquidity can be constrained in the short run and result in more persistent mispricing. To empirically examine asset fire sales in equity markets and the effects of institutional price pressure more generally, we construct a sample of situations where widespread mutual fund selling in response to capital outflows is concentrated in a limited number of securities. Fundamental value is not immediately observable, but by studying systematic patterns in abnormal returns over time, we can identify deviations between transaction prices and fundamental value ex post if we find evidence of significant price reversals following forced transactions. We attempt to disentangle price pressure from information effects by focusing on situations where the fire sale story predicts that mutual fund sales are motivated by necessity, as opposed to opportunistic information-based trading. In particular, we focus on mutual fund stock transactions that are forced by financial distress and therefore unlikely to reveal much new information about the individual securities being sold, and where there is considerable overlap in the holdings among poorly performing funds. The empirical results provide considerable support for the view that concentrated mutual fund sales forced by capital flows exert significant price pressure in equity markets, often resulting in transaction prices far from fundamental value. We find that poor performance leads to capital outflows for mutual funds, the most serious of which we consider financial distress. This corroborates previous research, which finds a strong relation between mutual fund flows and past performance (e.g., Ippolito, 1992; Chevalier and Ellison, 1997; Sirri and Tufano, 1998). The analysis also indicates that flows into and out of mutual funds do indeed force trading. Mutual funds in the bottom decile of capital flows are roughly twice as likely to reduce, or eliminate holdings, as funds experiencing normal flows. This forced trading can be especially costly when there is significant overlap with the securities held by other funds experiencing outflows, as transactions appear to occur far from fundamental value. We estimate that investors providing liquidity to the distressed funds earn significant abnormal returns over the subsequent months. Somewhat surprisingly, we also find that extreme inflows can be costly for mutual funds. Funds experiencing large inflows tend to increase their existing positions, creating significant price pressure in the stocks held in common by these funds. Like the asset fire sales, these inflow-driven purchases produce trading opportunities for outsiders. Finally, we show that forced transactions are predictable, which creates an opportunity for front-running. An investment strategy that short sells stocks most likely to be the subject of widespread flow-induced selling, and buys ahead of anticipated forced purchases, earns average annual abnormal returns well over 10%. This paper is organized as follows. Section 2 describes the data. Section 3 presents evidence on the existence and magnitudes of flow-induced price pressure in equity markets. Section 4 investigates the strategic trading behavior of funds in response to extreme flows. Section 5 examines the incentives for providing liquidity during crisis periods and for front-running. Section 6 discusses the persistence of institutional price pressure, and Section 7 concludes.
نتیجه گیری انگلیسی
This paper studies asset fire sales, and institutional price pressure more generally, in equity markets by examining a large sample of stock transactions of mutual funds. We find considerable support for the notion that widespread selling by financially distressed mutual funds leads to transaction prices below fundamental value. Somewhat surprisingly, we find that funds with large inflows behave as if they too are constrained to quickly transact in their existing positions, on average buying more of what they already own. When inflow-driven purchases are widespread relative to the potential sellers of individual securities, these forced purchases also result in persistent institutional price pressure. These findings suggest that even in the most liquid markets there can be a significant premium for immediacy. The price effects are relatively long-lived, lasting around two quarters and taking several more quarters to reverse. This evidence adds to previous findings of price pressure effects around index additions and stock-financed mergers. Short-run excess demand curves for stocks appear to be less than perfectly elastic. Asset fire sales and inflow-driven purchases are probably the most significant cost of financial distress for money management firms. Given that most of these firms have selected an organizational form that allows capital providers to add or withdraw capital on demand, this suggests that the expected costs of liquidity provision are low. However, when many funds are forced to transact the same stocks at the same time, the price impact can be substantial. The existence of institutional price pressure in equity markets is informative about the organization of money management firms and, in turn, the effect that these organizations have on prices. First, it suggests that the costs associated with being informed about an individual security can be substantial. Merton (1987) argues that large fixed costs of becoming informed about an investment opportunity can initially limit arbitrage investing, and once the costs are borne, it can take a while to learn how best to exploit the opportunity. Moreover, these costs can lead firms to specialize. Specialization limits the ability to diversify, exposing firms to additional risks, which Shleifer and Vishny (1997) describe as limits to arbitrage. It certainly appears that many funds follow highly similar strategies, such that there are times when many face redemptions and are contemporaneously forced to transact the same securities. In addition, it seems that it takes a while for forced transactions to be understood by strategy outsiders, creating time variation in transaction costs, and allowing prices to deviate from their fundamental value for several months. Importantly, the asset fire sale story provides a mechanism for rational mispricing. The market is clearly somewhat inefficient, in that market prices are not perfectly reflective of all available information. However, the basis of this mispricing requires neither irrational investors nor managers. Prices eventually reflect available information, but sometimes with a significant delay.