Abstract
We explore institutional investor trading decisions during crisis periods and provide evidence that the flight-to-liquidity premium is at least partially driven by mutual fund flows. Mutual funds, on aggregate, reduce their holdings of illiquid stocks. This reduction is a result of larger withdrawals from funds that hold less liquid stocks, and not of fund manager strategic trading decisions. Fund managers are forced to trade, which in turn creates a direct selling pressure that contributes to the decline in illiquid stocks prices. These findings suggest a new and important link between the literature on the price impact of institutional flows and systematic liquidity pricing.
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