Mutual Fund Liquidity Management, Stock Liquidity, and Corporate Disclosure

Abstract

This study presents novel evidence that mutual fund liquidity management affects stock liquidity. Exploiting a proposal by the U.S. Securities and Exchange Commission (SEC) as an exogenous shock to mutual fund liquidity management, I find that mutual fund liquidity management improves stock liquidity of firms in mutual fund portfolios. This improvement is more pronounced when mutual funds have stronger incentives to improve portfolio liquidity and more resources to influence firms and when portfolio firms have lower stock liquidity prior to the SEC proposal. Consistent with mutual funds influencing portfolio firms to be more transparent, I further show that improving disclosure among portfolio firms is one mechanism through which stock liquidity is improved. Overall, the results indicate that liquidity management at the fund level has important implications for stock liquidity and information disclosure of portfolio firms.

Keywords: mutual fund liquidity management, stock liquidity, corporate disclosure

JEL Classification: G23, D40, M41, D82