We hypothesize that poor country-level governance, which makes public information less reliable, induces fund managers to increase their use of semi-public information. Utilizing data from international mutual funds and stocks over the 2000-2009 period, we find that semi-public information-related stock rebalancing can be five times higher in countries with the worst quality of governance than in countries with the best. The use of semi-public information increases price informativeness but also increases information asymmetry and reduces stock liquidity. It also intensifies the price impact and liquidity crunch during the recent global financial crisis.
Bibliographical noteA post of the paper is featured at Harvard Law School Forum on Corporate Governance and Financial Regulation on Monday October 29, 2014, (http://blogs.law.harvard.edu/corpgov/2014/10/29/mutual-funds-and-information-diffusion-the-role-of-country-level-governance/)
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