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Cash Induced Demand

Published online by Cambridge University Press:  12 December 2022

Huaizhi Chen Open the ORCID record for Huaizhi Chen [Opens in a new window]
Huaizhi Chen*
Affiliation:
University of Notre Dame Mendoza College of Business
*
hchen11@nd.edu
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Abstract

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I show that cash distributions through cash mergers, dividend payments, and stock buybacks are, in principle, similar to investor fund flows in generating demand for investable assets. Abnormal returns on certain assets can be forecasted because delegated investors predictably reinvest cash returns toward certain holdings. Novel measures of stock-level demand constructed using proportional reinvestments by mutual funds predict abnormal returns and issuances in noncash-paying stocks. These results highlight an alternative and substantial source of price fluctuations in the cross section of equities.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 1 , February 2024 , pp. 195 - 220
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

I thank Malcolm Baker, Robert Battalio, Susan Christoffersen, Lauren Cohen, Zhi Da, Paul Gao, Robin Greenwood, Shiyang Huang, Markus Ibert, Dong Lou, Tim Loughran, Christopher Malloy, Christopher Polk, Sophie Shive, Andrei Shleifer, Erik Stafford, René Stulz, and Luis Viceira for their valuable comments and suggestions. I thank the participants at AFA 2019, American University, AQR Capital Management, the FMA Asia Conference, Northeastern University, Ohio State University, the University of Delaware, the 2018 Southern Finance Association Conference, 2019 Midwest Finance Association Conference, and the University of Notre Dame for their valuable input. I also thank an anonymous referee and the editor for their substantial contributions. A large part of this research was conducted during my post-doctoral fellowship supported by the Behavioral Finance and Financial Stability Initiative at Harvard Business School. This article was previously circulated as “Capital Redeployment in the Equity Market.”

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