Working Paper: CEPR ID: DP8819
Authors: Harald Hau; Sandy Lai
Abstract: The early stage of the recent financial crisis was marked by large value losses for bank stocks. This paper identifies the equity funds most affected by this valuation shock and examines its consequences for the non-financial stocks owned by the respective funds. We find that (i) ownership links to these 'distressed equity funds' lead to large underperformance of the most exposed non-financial stocks, and in aggregate this contributes an additional 10.9% to the overall stock market downturn; (ii) distressed fire sales and the associated price discounts are concentrated among those exposed stocks which perform relatively well; and (iii) stocks with higher fund ownership generally performed much better throughout the crisis.
Keywords: financial crisis; propagation; fire sales; mutual funds
JEL Codes: G11; G14; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ownership links to distressed equity funds (G32) | significant underperformance of nonfinancial stocks (G41) |
| distressed equity funds (G32) | underperformance of nonfinancial stocks relative to industry peers (G32) |
| distressed fire sales (G33) | liquidation of best-performing nonfinancial stocks (G33) |
| higher overall fund ownership (G23) | lower capital depreciation during the crisis (G31) |
| ownership structure of equity funds (G23) | crisis performance of individual stocks (G01) |
| ownership by distressed funds (G32) | negative effect on crisis performance of individual stocks (G01) |