Cash Induced Demand

Huaizhi Chen

I show that cash distributions through cash mergers, dividend payments, and stock buybacks are, in principle, similar to investor fund flows in generating demand for investable assets. Abnormal returns on certain assets can be forecasted because delegated investors predictably reinvest cash returns toward certain holdings. Novel measures of stock-level demand constructed using proportional reinvestments by mutual funds predict abnormal returns and issuances in non-cash-paying stocks. These results highlight an alternative and substantial source of price fluctuations in the cross section of equities.