Do fire sale and cash outflow cause mutual funds to perform badly?

Abstract

Coval and Stafford (2007) show that the flow-induced selling of stocks significantly negatively affects the prices of those stocks. Using the US data from 1990 to 2012, this paper examines whether the percentage of fire sale stocks held by a mutual fund significantly affects the performance at the mutual fund level. The average holding of fire sale stocks is less than 5% but fire sales seem to significantly affect the mutual fund performance during the quarter the fire sales occurred even after controlling for outflows. However, the poor performance of mutual funds with large fire sales does not last beyond the event quarter. We do not find any significant differences in the impacts of cash flows on the mutual fund performance during the high VIX and NBER recession periods, compared to other normal periods. Even if the effect of the fire sales stocks holdings to the performance of mutual fund do not significantly change during the NBER recession periods, the effect of the fire sales stocks holdings significantly change during the high VIX periods.