The Small World of Investing: Board Connections and Mutual Fund Returns
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.
We would like to thank Malcolm Baker, Nick Barberis, John Campbell, Judy Chevalier, Jennifer Conrad, Kent Daniel, Will Goetzmann, Steve Kaplan, Owen Lamont, Alexander Ljungqvist, Toby Moskowitz, Fiona Scott Morton, Ludovic Phalippou, Bob Shiller, Jeremy Stein, Mike Weisbach, and seminar participants at the University of Chicago, Yale University, London Business School, Harvard University, University of Illinois, Erasmus Universiteit Rotterdam, 2007 Asset Pricing Mini Conference at Washington University, AQR Capital Management, and Goldman Sachs Asset Management for helpful comments. We also thank BoardEx and Linda Cechova for providing firm board data, and Morningstar and Annette Larson for providing mutual fund data. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
- Among managers with the strongest connection to senior officials (same school at the same time with the same degree), the connected...
Lauren Cohen & Andrea Frazzini & Christopher Malloy, 2008. "The Small World of Investing: Board Connections and Mutual Fund Returns," Journal of Political Economy, University of Chicago Press, vol. 116(5), pages 951-979, October. citation courtesy of