Skin in the Game or Playing with Fire: Fund Insider Ownership and Firm-Level Stock Price Crash Risk

Using a dataset of Chinese mutual funds and public firms from 2009 to 2023, we provide robust empirical evidence that firms with higher fund insider ownership—shares held by fund insiders through their managed funds—exhibit greater future stock price crash risk. Channel tests reveal that individual investors and fund peers interpret fund insider ownership as a positive signal of firms' future stock market performance, fueling heightened optimism and herding behavior toward firms with high fund insider ownership. Moreover, such firms experience more site visits from mutual funds, intensifying their pressure to suppress negative news to bolster short-term stock prices. Cross-sectional analysis reveals that this effect is more pronounced in firms with weaker stock market performance, higher analyst coverage, or less information disclosure. Our study suggests that fund insider ownership, designed to mitigate agency conflicts between fund investors and insiders, may inadvertently destabilize the stock market. JEL classification : G12; G14; G23