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

Abstract

Mutual funds create liquidity for investors by issuing demandable equity shares, whose value is sensitive to information about illiquid portfolio assets. We study the implications of this information-sensitive liquidity creation by examining frequent trading suspensions in China. These suspensions render stocks illiquid, causing significant mispricing of mutual funds through inaccurate valuations of their illiquid holdings. We find that investors actively acquire information about suspended stocks held by mutual funds. This information drives flows into underpriced funds and is incorporated into stock prices when trading resumes. Our findings suggest that mutual fund liquidity creation stimulates information acquisition about illiquid, information-sensitive assets.