Short-selling and mutual fund herding: The Chinese evidence

Using short-selling pilot programs in China as quasi-natural experiments, we investigate how short-selling impacts mutual fund herding. We find that mutual funds herd more on firms eligible for short-selling than those not. The effect is larger for firms with fewer media coverage, higher financial reporting opacity, or lower audit quality. Channel tests show that short-selling decreases information asymmetry proxied by informed trading and stock illiquidity. Additionally, short-selling strengthens the price impact of herding without causing reversals. Our findings fit the correlated signal theory: mutual funds receive more similar information on firms eligible for short-selling and, thus, herd more on them.