Abstract
We measure a stock's exposure to fire sale risk through its ownership links to equity mutual funds that experience outflows during periods of systematic outflows from the fund industry. We find that more exposed stocks earn higher average returns: a portfolio that buys (shorts) stocks with the highest (lowest) exposure outperforms by 3-7% per annum. Our findings cannot be explained by several known determinants of average returns and are consistent with the ex-ante pricing of the risk of future fire sales. We conclude that stocks' exposures to risks inherited from the constraints of shareholders have important implications for stock prices.
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