Equity fire sales and herding behavior in pension funds

This study analyzes the effects of a regulatory shock that generates pressure to sell the excess equity investment maintained by Chilean Pension Fund Administrators (AFPs). This quasi-natural experiment allows us to gauge the impact of fire sales in an emerging economy with a strong presence of institutional investors allocating portfolios in the context of herding behavior. The sample consists of panel data for pension funds and equities in their portfolios. We find that herding is relevant when explaining the pressure to sell stocks after the regulatory shock. In addition, AFP sales decision-making considers stock characteristics such as stock ownership, market capitalization terciles of the traded companies, breadth of ownership, and stock illiquidity. These results are relevant for policymakers and capital market participants alike when analyzing portfolio decision-making in pension funds.