Kalok Chan, Si Cheng, and Allaudeen Hameed
Fund flows are more correlated among funds with similar investment horizon, consistent with correlated demand for liquidity. We find that stocks held by institutions with more heterogeneous investment horizon are more liquid and have lower volatility of liquidity. Identification tests confirm the improvement in stock liquidity holds when the increase in investor heterogeneity arises from (a) addition of a stock to the S&P 500 index, and (b) an exogenous shock due to the 2003 tax reform. Additionally, extreme flow-induced trading by institutional funds has a bigger price impact when stocks have less heterogeneous investor base.