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<p>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—defined as shares held by fund insiders through the funds they manage—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 investor optimism and mutual fund herding behavior toward firms with high fund insider ownership. Moreover, such firms are found to engage in more aggressive accrual-based earnings management and exhibit a higher propensity for financial restatements, consistent with the argument that fund insider ownership intensifies their pressure to suppress negative news. Cross-sectional analysis reveals that this effect is more pronounced in firms with weaker stock market performance, higher analyst coverage, or less information disclosure. Furthermore, the effect is attenuated when trading directions diverge between funds with and without insider holdings within the same fund family. Our study suggests that fund insider ownership, designed to mitigate agency conflicts between fund investors and insiders, may inadvertently destabilize the stock market.</p>

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Skin in the game or playing with fire: fund insider ownership and firm-level stock price crash risk

  • 期刊论文

  • 发表日期：

    2026年6月24日

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  • Wenwu Cai,
  • Zhuang Zhuang,
  • Cheng Xiang

摘要

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—defined as shares held by fund insiders through the funds they manage—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 investor optimism and mutual fund herding behavior toward firms with high fund insider ownership. Moreover, such firms are found to engage in more aggressive accrual-based earnings management and exhibit a higher propensity for financial restatements, consistent with the argument that fund insider ownership intensifies their pressure to suppress negative news. Cross-sectional analysis reveals that this effect is more pronounced in firms with weaker stock market performance, higher analyst coverage, or less information disclosure. Furthermore, the effect is attenuated when trading directions diverge between funds with and without insider holdings within the same fund family. Our study suggests that fund insider ownership, designed to mitigate agency conflicts between fund investors and insiders, may inadvertently destabilize the stock market.