The information in asset fire sales

• Main Authors: HUANG, Sheng, RINGGENBERG, Matthew, ZHANG, Zhe
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2019
• Subjects: Adverse selection; asymmetric information; fire sales; information economics; institutional investors; slow moving capital; Finance
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/5894; https://ink.library.smu.edu.sg/context/lkcsb_research/article/6893/viewcontent/Informed_Fire_Sale_Jan_2022.pdf
• Institution: Singapore Management University

Asset prices remain depressed for several years following mutual fund fire sales. We show that this price pressure is partly due to asymmetric information which leads to an adverse selection problem for arbitrageurs. After a flow shock, fund managers do not scale down their portfolio, rather, they choose to sell a subset of low-quality stocks that subsequently underperform. In other words, fund managers have stock selling ability. Our findings suggest an explanation for the tendency of asset prices to remain depressed following fire sales: information asymmetries make it difficult for arbitrageurs to disentangle pure price pressure from negative information.