Does mutual fund ownership reduce stock price clustering? Evidence from active and index funds

The literature is rich with examples of price clustering in financial markets. This study focuses on the relation between mutual fund ownership (both active and passive) and stock price clustering. To the extent that mutual funds are sophisticated investors, we posit that their trades are associated with lower levels of price clustering. We find support for this hypothesis as total, active, and passive mutual fund ownership are negatively related to the degree of price clustering. Surprisingly, price clustering’s association to passive (e.g. index) mutual fund ownership is an order of magnitude greater than to active ownership.