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This paper investigates whether the proximity between mutual funds and firms could explain corporate innovation. I find that local mutual funds tend to increase firms' R&D expenditures and productivity. Firms with greater local ownership produce more patents and patents with bigger impact. The positive relations are more pronounced for firms with low information quality and poor corporate governance. Further, local funds with more innovative firms outperform the ones with less innovative firms. Finally, firms with higher local ownership are less likely to fire CEOs who engage in innovation, which incentivizes CEOs for risky investments.

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This paper investigates whether the relationship between investment banks and their affiliated funds helps the funds deliver superior performance due to the information advantage or whether it costs the funds due to the conflict of interest. Using firms with class‐action lawsuits, I examine whether underwriter‐affiliated funds can avoid a potential economic loss from the underwriting clients’ fraudulent activities. Consistent with the information advantage hypothesis, I find that affiliated funds reduce their stakes in underwritten firms before the disclosure of the firms’ misconduct. Additionally, I find that significant selling activity by the affiliated funds can predict the outcome of a potential lawsuit.