Conclusion
This paper investigates the impacts of mutual fund herding behaviours on corporate disclosure and consequently on stock price crash risk. First, we find that mutual fund herding deteriorates corporate disclosure quality. Firms with high mutual fund herding have less private information available, lower earnings transparency, higher likelihoods of accounting errors, and lower accounting conservatism. Second, we find a strong predictive relationship between mutual fund herding and stock price crashes. We use one natural experiment using the 2004 SEC regulation change on mutual fund portfolio disclosure to address the reverse causality issue. To mitigate the omitted variable bias that our findings are driven by other factors (such as information asymmetry between outside investors and managers), we further control for firm fixed effects and adopt propensity score matching to explicitly control for information asymmetry. Our main findings are also robust to alternative herding and crash measures and different regression model specifications. Third, we find that the predictive relationship between mutual fund herding and stock price crashes is concentrated in buy-herding rather than sell-herding. We further take into account the price impact factor and discover that our findings cannot be fully explained by it. Finally, after triple sorting the sample by firm size, disclosure quality, and herding measures, we find that the relation between mutual fund herding and stock price crashes is much stronger in the subsample of firms with smaller size and with lower disclosure quality. This test partially supports our conjecture that disclosure quality acts as one of the channels through which mutual fund herding leads to stock price crashes, when firms suffer severe information asymmetry.
