Mutual Fund Liquidity Management, Stock Liquidity, and Corporate Disclosure

This study presents the first evidence that mutual fund liquidity management affects both stock liquidity and information disclosure of portfolio firms. Using a difference-in-differences approach that exploits a proposal by the U.S. Securities and Exchange Commission (SEC) as an exogenous shock to mutual fund liquidity management, I find causal evidence that mutual fund liquidity management improves liquidity of underlying stocks. The liquidity 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 and higher information asymmetry prior to the SEC proposal. I further show that mutual funds may exert pressure on portfolio firms to improve their disclosure as a channel to improve stock liquidity. Overall, the results indicate that liquidity management at the fund level has important implications for stock liquidity and information disclosure of portfolio firms.