Friend or foe: On a common shareholder relationship between mutual funds and public companies

Abstract

We examine a novel business tie between mutual funds and public firms in China via a common shareholder (CS) relationship, in which a fund management company (FMC)'s shareholder also has a substantial stake in a public company invested by this FMC. The CS relationship may give connected funds an information advantage about the company over non-related funds. Meanwhile, mutual funds may engage in investment activities that help support stock prices of its CS-connected companies. Empirical evidence supports the superior information hypothesis but not the price support hypothesis. The holdings of CS-connected FMCs significantly predict subsequent stock returns. Moreover, such superior information is related to company fundamentals rather than short-term corporate events.