Public Placement Fund Investment In China An Empirical Study On Scale Effect On The Price Of The Stock Market

As one of the key players in China's A-share market, how mutual funds affect stock pricing? What are its impacts on the equity valuation, liquidity, volatility and return? Does mutual funds investment improve the efficiency of stock pricing? Based on previous research, this paper expands the research scope on these questions. Firstly, the interaction mechanism between the scale of funds investment and stock pricing efficiency is outlined by historical data analysis and logical reasoning. Then the mutual funds' investment effects on equity valuation, liquidity, volatility and return are analyzed through empirical analysis in two levels:macro (the A-share market) and micro (fund positions of individual stocks). In the marco level, three multi-factor differential models are built to make regression analysis on time series data from May 2001 to Feb 2010. In the micro level, four multi-factor models are built to make analysis on eight quarter's data from 2008 to 2009, using Fama-MacBeth regression method.Empirical results show that the scale of mutual funds investment can improve stock pricing efficiency in two ways. Firstly, mutual funds discover undervalued stocks, buy these stocks and hold until the prices are closer to the stocks' internal value. It can prevent stock price bubble and improve stock pricing efficiency. Secondly, mutual funds' investment strategy decreases stock turnover ratio and liquidity, which means that mutual funds have less noise trading and improve stock pricing efficiency. In addition, the study found that mutual funds' investment impacts on market and stock volatility are not significant, which is different from other people's previous research. Furthermore, based on logical reasoning of empirical results and historical data, this study shows that the interaction between funds investment scale and market pricing efficiency has a self-stabilizing mechanism.