Mutual Funds and Information Diffusion: The Role of Country-Level Governance

Tinbergen Institute Discussion Paper 14-079/IV/DSF76

Review of Financial Studies 2014, issue 27: page 3343-3387

55 Pages Posted: 4 Jul 2014 Last revised: 26 Oct 2014

See all articles by Melissa Lin

Melissa Lin

Erasmus University Rotterdam; Tinbergen Institute

Massimo Massa

INSEAD - Finance

Hong Zhang

Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2014

Abstract

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: Mutual Funds, Information Diffusion, Country-Level Governance, Semi-public Information, Liquidity

JEL Classification: G10, G23

Suggested Citation

Lin, Chunmei and Massa, Massimo and Zhang, Hong, Mutual Funds and Information Diffusion: The Role of Country-Level Governance (July 1, 2014). Review of Financial Studies 2014, issue 27: page 3343-3387. Available at SSRN: https://ssrn.com/abstract=2461276

Chunmei Lin (Contact Author)

Erasmus University Rotterdam ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Hong Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

HOME PAGE: http://eng.pbcsf.tsinghua.edu.cn/content/details167_7995_x.html

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