Demand Curves For Stocks Do Not Slope Downwards: Evidence Using an Exogenous Supply Shock

We analyze the price impact of an exogenous share sale by inside blockholders, who were forced to sell a part of their shareholdings due to a regulatory change in India. The affected firms experience a negative excess return of 4.3 during the issue week. Crucially, the price impact reverses in about 16 days after the event. Our results are consistent with the view that the long term demand curves for stocks are flat: a view echoed by classical finance theories. The short term price reaction to a sale is likely to be a result of temporary price pressure.