Working Paper: NBER ID: w13121
Authors: Lauren Cohen; Andrea Frazzini; Christopher Malloy
Abstract: This paper uses social networks to identify information transfer in security markets. We focus on connections between mutual fund managers and corporate board members via shared education networks. We find that portfolio managers place larger bets on firms they are connected to through their network, and perform significantly better on these holdings relative to their non-connected holdings. A replicating portfolio of connected stocks outperforms a replicating portfolio of non-connected stocks by up to 8.4% per year. Returns are concentrated around corporate news announcements, consistent with mutual fund managers gaining an informational advantage through the education networks. Our results suggest that social networks may be an important mechanism for information flow into asset prices.
Keywords: social networks; mutual funds; investment performance; information flow
JEL Codes: G10; G11; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mutual fund managers connected through shared educational backgrounds (G23) | invest more heavily in these firms (G24) |
| mutual fund managers connected through shared educational backgrounds (G23) | higher returns (G12) |
| invest more heavily in these firms (G24) | higher returns (G12) |
| social networks (Z13) | investment returns (G11) |
| social networks (Z13) | herding in trading decisions (C92) |
| performance of connected holdings (G39) | significantly better performance (D29) |