Stock’s Overvaluation With Mutual Fund’s Buying Pressure

With the development of financial market in China, mutual funds have been growing fast, becoming the most important institutional participants. And among all organizing forms, open-ended equity funds make up a large proportion no matter from the quantity or from the total net assets.Price pressure hypothesis infers that block trade would have a significant influence on stocks’prices. Using the stocks holding data from 2005 to 2013 about open-ended equity funds, we’d like to study whether the buying pressure from mutual funds accompany the overvaluation of according stocks.Dividing buying pressure into ’Inflow-Driven’ and ’Information-Driven’, we compare the two groups of stocks----IBP stocks and WBP stocks. The comparison shows that there is no difference between them; but both of them may be overvalued.Considering IBP/WBP stocks as a whole group and comparing them with the new control groups, we find that IBP/WBP stocks do have return reversion which could be expected if the stocks were overvalued. And the control stocks show no such pattern.We also regressed the accumulated abnormal return with the mutual fund buying pressure Flow, controlling Beta and Beta, size, BM ratio respectively. The coefficients of Flow are all significantly negative.Finally, we compare the probability of SEO between the two groups. IBP/WBP stocks are more likely to be seasoned offered, no matter the time period is half year or one year.