Abstract
Uninformative stock price fluctuations induced by volatile mutual fund flows generate unintended consequences for corporate debt financing. We propose a measure of stock-level passive equity mutual fund flow-induced volatility pressure and find that it positively affects the bond yield spread at issuance through higher perceived risks revealed by increased equity volatility. Although flow-induced volatility is costly to the borrowing firm, in contrast to equity volatility, it has no significant association with future firm fundamental risk. Our study reveals a dark side of passive investing.
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