We posit and demonstrate that, in China’s retail-dominated market, quantitative trading over-relies on non-fundamental signals, thereby crowding out fundamental information from stock prices and increasing crash risk. Using trading data from quantitative mutual funds and Chinese A-share firms during 2009-2023, we find that greater exposure to quantitative trading is associated with higher future crash risk. Mediation analysis further reveals that reduced information efficiency constitutes a key channel through which quantitative trading elevates crash risk. The effect is stronger for stocks with more retail investors, consistent with our proposed mechanism. Overall, we identify a novel potential risk of quantitative trading in underdeveloped emerging markets.

This study examines the impact of quantitative investment on stock price crash risk from the perspective of quantitative mutual funds holdings. The results show that quantitative mutual funds holdings can significantly reduce stock price crash risk, and this effect is more pronounced in subsamples characterized by executives with overseas backgrounds, higher internal governance efficiency, greater analyst attention, and higher profit volatility. Further research finds that quantitative mutual funds holdings can suppress the risk of stock price crash by smoothing the volatility of stock returns and optimizing the valuation of firms. This study sheds light on the effects of quantitative investment on stock price crash risk.