Mutual funds create liquidity for investors by issuing demandable equity shares while holding illiquid securities. We study the implications of this liquidity creation by examining frequent trading suspensions in China, which temporarily eliminate market liquidity in affected stocks. These suspensions cause significant mispricing of mutual funds due to inaccurate valuations of their illiquid holdings. We find that investors actively acquire information about suspended stocks held by mutual funds, driving flows into underpriced funds. This information is subsequently incorporated into stock prices when trading resumes. Our findings suggest that mutual fund liquidity creation stimulates information acquisition about illiquid, information-sensitive assets.

This paper studies the trading behavior of investors facing a large number of firm-initiated stock trading suspension events during the Chinese stock market crisis in July of 2015. Using account-level trading data from the Shanghai Stock Exchange, we find that investors with a higher fraction of holding value in suspension sell less (or purchase more) of non-suspended stocks. Consequently, non-suspended stocks whose shareholders having high average account- level suspension fraction experience a relative price appreciation, which subsequently reverses. These evidences indicate that trading suspension can calm down investors and therefore helps to stabilize the volatile market in crisis time.

This paper studies the trading behavior of investors facing a large number of firm-initiated stock trading suspension events during the Chinese stock market crisis in July of 2015. Using account-level trading data from the Shanghai Stock Exchange, we find that investors with a higher fraction of holding value in suspension sell less (or purchase more) of non-suspended stocks. Consequently, non-suspended stocks whose shareholders having high average account level suspension fraction experience a relative price appreciation, which subsequently reverses. These evidences indicate that trading suspension can calm down investors and therefore helps to stabilize the volatile market in crisis time.