Working Paper: NBER ID: w13973
Authors: Lauren Cohen; Andrea Frazzini; Christopher Malloy
Abstract: We study the impact of social networks on agents' ability to gather superior information about firms. Exploiting novel data on the educational backgrounds of sell side equity analysts and senior officers of firms, we test the hypothesis that analysts' school ties to senior officers impart comparative information advantages in the production of analyst research. We find evidence that analysts outperform on their stock recommendations when they have an educational link to the company. A simple portfolio strategy of going long the buy recommendations with school ties and going short buy recommendations without ties earns returns of 5.40% per year. We test whether Regulation FD, targeted at impeding selective disclosure, constrained the use of direct access to senior management. We find a large effect: pre-Reg FD the return premium from school ties was 8.16% per year, while post-Reg FD the return premium is nearly zero and insignificant. In contrast, in an environment that did not change selective disclosure regulation (the UK), the analyst school-tie premium has remained large and significant over the entire sample period.
Keywords: Social Networks; Information Dissemination; Sell-Side Analysts; Regulation FD
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 |
|---|---|
| analysts with educational ties to senior officers (J45) | superior stock recommendations (G17) |
| school ties (Y80) | outperform peers (P17) |
| school ties (Y80) | outperform non-tied stocks (G12) |
| Regulation FD (G18) | impact on school ties performance (I24) |
| U.K. market (G15) | school-tie premium remains significant (G12) |
| number of school ties (I20) | likelihood of being recognized as all-star analysts (Z22) |