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Mutual Fund Trading Pressure: Firm‐Level Stock Price Impact and Timing of SEOs
Author(s) -
KHAN MOZAFFAR,
KOGAN LEONID,
SERAFEIM GEORGE
Publication year - 2012
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2012.01750.x
Subject(s) - mutual fund , business , equity (law) , monetary economics , market liquidity , insider , stock (firearms) , exploit , finance , financial economics , economics , mechanical engineering , computer security , political science , computer science , law , engineering
We use price pressure resulting from purchases by mutual funds with large capital inflows to identify overvalued equity. This is a relatively exogenous overvaluation indicator as it is associated with who is buying—buyers with excess liquidity—rather than what is being purchased. We document substantial stock price impact associated with purchases by high‐inflow mutual funds, and find the probability of a seasoned equity offering (SEO), insider sales, and the probability of a stock‐based acquisition increase significantly in the four quarters following the mutual fund buying pressure. These results provide new evidence that firm managers are able to identify and exploit overvalued equity.