The effect of mutual fund herding on stock mispricing

Abstract

This paper examines the impact of mutual fund herding on stock mispricing in China's stock market. Our analysis shows that mutual fund herding significantly intensifies stock mispricing, particularly during periods of heightened investor sentiment. This effect is most pronounced in stocks with high mutual fund ownership, positive returns, and overvaluation. To address endogeneity concerns, we exploit two exogenous events: the Split-Share Structure Reform and the introduction of stricter mutual fund disclosure regulations in 2019. Our findings indicate that mutual fund herding significantly drives stock prices in response to these shocks, confirming its causal role in the stock mispricing. Robustness checks, including alternative model specifications and additional controls, validate the stability of our findings.