Mutual Funds and Information Diffusion: The Role of Country-Level Governance
Forthcoming, The Review of Financial Studies
53 Pages Posted: 19 Aug 2011 Last revised: 12 Sep 2014
Date Written: May 1, 2014
We hypothesize that poor country-level governance, which makes public information less reliable, induces fund managers to increase their use of semi-public information. Utilizing data from international mutual funds and stocks over the 2000-2009 period, we find that semi-public information-related stock rebalancing can be five times higher in countries with the worst quality of governance than in countries with the best. The use of semi-public information increases price informativeness but also increases information asymmetry and reduces stock liquidity. It also intensifies the price impact and liquidity crunch during the recent global financial crisis.
Keywords: governance, semi-public information, mutual funds, liquidity
JEL Classification: G10, G23
Suggested Citation: Suggested Citation