Working Paper: NBER ID: w23522
Authors: Marco Di Maggio; Francesco Franzoni; Amir Kermani; Carlo Sommavilla
Abstract: This paper shows that the network of relationships between brokers and institutional investors shapes the information diffusion in the stock market. We exploit trade-level data to show that central brokers gather information by executing informed trades, which is then leaked to their best clients. We show that after large informed trades, a significantly higher volume of other institutional investors execute similar trades through the same broker, allowing them to capture higher returns in the first few days after the initial trade. In contrast, we find that when the informed asset manager is affiliated with the broker, such imitation does not occur. Similarly, we show that the clients of the broker employed by activist investors to execute their trades tend to buy the same stocks just before the filing of the 13D. This evidence also suggests that an important source of alpha for fund managers is the access to better connections rather than superior skill.
Keywords: Broker networks; Information diffusion; Stock market; Institutional investors; Central brokers
JEL Codes: G12; G14; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| broker centrality (G24) | abnormal returns (G14) |
| large informed trades (G14) | similar trades through the same broker (G24) |
| broker affiliation of informed asset manager (G24) | imitation behavior (C92) |
| clients of brokers employed by activist investors (G24) | buy the same stocks before 13D filings (G34) |
| broker connections (G24) | alpha for fund managers (G11) |