Mutual Fund Illiquidity and Stock Price Fragility: A Study Based on Chinese Mutual Funds

Abstract

From the perspective of the Chinese equity fund shareholding, the authors study the economic consequences of institutional investors’ shareholding illiquidity. They use the stock holding data of Chinese mutual funds to verify that the illiquidity of mutual funds’ stock holding brings fragility to individual stock returns. Specifically, to meet investor redeeming requirement, illiquid fund managers are forced to fire-sale assets. The selling pressure caused by this behavior makes the stock be traded at a price lower than its true value, increasing the stock price collapse risk. Finally, using COVID-19 case data in China, the authors design a quasi-natural experiment confirming the conclusion in this article.