Fire sale risk and expected stock returns

George O. Aragon; Min S. Kim

doi:10.1016/j.jfineco.2023.06.006

Fire sale risk and expected stock returns

Research output: Contribution to journal › Article › peer-review

Abstract

We measure a stock's exposure to fire sale risk through its ownership links to mutual funds that anticipate significant outflows during periods of systematic outflows from the fund industry. We find that stocks with higher exposure to this risk earn higher average returns: a portfolio that buys (shorts) stocks with the highest (lowest) exposure outperforms by 3-7% annually. Our findings cannot be explained by several known determinants of average returns and support the ex-ante pricing of the risk of fire sales. We conclude that stocks’ exposures to risks inherited from the constraints of shareholders have important implications for stock prices.

Original language	English (US)
Pages (from-to)	578-609
Number of pages	32
Journal	Journal of Financial Economics
Volume	149
Issue number	3
DOIs	https://doi.org/10.1016/j.jfineco.2023.06.006
State	Published - Sep 2023
Externally published	Yes

Keywords

Fire sales
Fund flows
Mutual fund
Ownership
Stock returns

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics
Strategy and Management

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10.1016/j.jfineco.2023.06.006

Cite this

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title = "Fire sale risk and expected stock returns",

abstract = "We measure a stock's exposure to fire sale risk through its ownership links to mutual funds that anticipate significant outflows during periods of systematic outflows from the fund industry. We find that stocks with higher exposure to this risk earn higher average returns: a portfolio that buys (shorts) stocks with the highest (lowest) exposure outperforms by 3-7% annually. Our findings cannot be explained by several known determinants of average returns and support the ex-ante pricing of the risk of fire sales. We conclude that stocks{\textquoteright} exposures to risks inherited from the constraints of shareholders have important implications for stock prices.",

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AB - We measure a stock's exposure to fire sale risk through its ownership links to mutual funds that anticipate significant outflows during periods of systematic outflows from the fund industry. We find that stocks with higher exposure to this risk earn higher average returns: a portfolio that buys (shorts) stocks with the highest (lowest) exposure outperforms by 3-7% annually. Our findings cannot be explained by several known determinants of average returns and support the ex-ante pricing of the risk of fire sales. We conclude that stocks’ exposures to risks inherited from the constraints of shareholders have important implications for stock prices.

KW - Fire sales

KW - Fund flows

KW - Mutual fund

KW - Ownership

KW - Stock returns

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Fire sale risk and expected stock returns

Abstract

Keywords

ASJC Scopus subject areas

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