“Stock Price Pressure and Biased Management Forecasts: Evidence from Fire Sales and Purchases by Mutual Funds” by Professor Guochang ZHANG
Professor Guochang ZHANG
Professor of Accounting
HKUST Business School
The Hong Kong University of Science and Technology
This paper establishes evidence of a causal link between stock price pressure and management forecast biases based on the exogenous events of fire sales and purchases of stocks by mutual funds. We find that managers issue optimistically biased forecasts in response to downward stock price pressure caused by mutual funds’ fire sales, but they do not issue pessimistically biased forecasts in response to upward price pressure from mutual funds’ fire purchases. This phenomenon is more pronounced for firms whose stocks have low market liquidity, firms facing tight financial constraints, and firms whose earnings are difficult to forecast. We then show that optimistic forecast biases have the effect of counteracting downward price pressure and speeding up price recovery that follows mutual funds’ fire sales. Our results indicate that management forecast biases can serve a beneficial role by mitigating mispricing when stocks undergo exogenous trading shocks.