Downward Sloping Demand Curve, Price Pressure, or Slow Moving Capital?: Evidence from an Exogenous Supply Shock

Abstract

We examine the price reaction to an exogenous share sale by inside blockholders, who were forced to reduce their stake due to a regulatory change. We conjecture that the price reaction to this event may be explained by three competing hypotheses, namely, a downward sloping demand curve, price pressure, and slow moving capital. Consistent with all three hypotheses, the affected firms experience a negative cumulative abnormal return of 4.5% during the week of the share sale. Crucially, prices revert completely in about 85 days, although the selling pressure eases within eight days. Our results are consistent with the slow moving capital paradigm and rule out the other hypotheses.