Information Acquisition By Mutual Fund Investors: Evidence from Stock Trading Suspensions

Mutual funds create liquidity for investors by issuing demandable equity shares while holding illiquid securities. We study the implications of this liquidity creation by examining frequent trading suspensions in China, which temporarily eliminate market liquidity in affected stocks. These suspensions cause significant mispricing of mutual funds due to inaccurate valuations of their illiquid holdings. We find that investors actively acquire information about suspended stocks held by mutual funds, driving flows into underpriced funds. This information is subsequently incorporated into stock prices when trading resumes. Our findings suggest that mutual fund liquidity creation stimulates information acquisition about illiquid, information-sensitive assets.

Keywords: Liquidity, Mutual Funds, Information Acquisition, Trading

Suggested Citation: Suggested Citation

Sialm, Clemens and Xu, David, Information Acquisition By Mutual Fund Investors: Evidence from Stock Trading Suspensions (November 01, 2023). SMU Cox School of Business Research Paper No. 24-18, Available at SSRN: https://ssrn.com/abstract=5047094 or http://dx.doi.org/10.2139/ssrn.5047094