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Information flows within financial conglomerates: Evidence from the banks-mutual funds relation

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  • Massa, Massimo
  • Rehman, Zahid
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    Abstract

    We study how information flows within financial conglomerates by analyzing the relations between mutual funds and banks that belong to the same financial group. We investigate the effect that the lending behavior of affiliated banks has on the portfolio choice of the mutual funds that are part of the same group. We show that funds (fund families) increase their stakes in the firms that borrow from their affiliated banks in the period following the deal by far greater amounts than other unaffiliated funds (fund families). We provide evidence that this strategy is information-driven. The performance of the positions of affiliated funds in the stocks of borrowing firms exceeds that of their other positions in nonborrowing stocks located in the same industry as well as that of other stocks having similar characteristics by up to 1.6% per month. Funds increase (decrease) their stock holdings in those borrowing stocks that subsequently provide positive (negative) abnormal returns, suggesting that they exploit privileged inside information not available to other market participants. This behavior is prevalent largely in funds located in close geographic proximity to their lending banks. Furthermore, it is exhibited mostly by young, small, and poorly performing fund families. Our evidence points to information flows within conglomerates through informal channels such as personal acquaintances.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 89 (2008)
    Issue (Month): 2 (August)
    Pages: 288-306

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    Handle: RePEc:eee:jfinec:v:89:y:2008:i:2:p:288-306

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    Web page: http://www.elsevier.com/locate/inca/505576

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    Cited by:
    1. Duarte-Silva, Tiago, 2010. "The market for certification by external parties: Evidence from underwriting and banking relationships," Journal of Financial Economics, Elsevier, vol. 98(3), pages 568-582, December.
    2. Clemens Sialm & T. Mandy Tham, 2011. "Spillover Effects in Mutual Fund Companies," NBER Working Papers 17292, National Bureau of Economic Research, Inc.
    3. Michalski, Tomasz & Örs, Evren, 2010. "(Inter-state) Banking and (Inter-state) Trade: Does Real Integration Follow Financial Integration?," CEPR Discussion Papers 7963, C.E.P.R. Discussion Papers.
    4. Berzins, Janis & Liu, Crocker H. & Trzcinka, Charles, 2013. "Asset management and investment banking," Journal of Financial Economics, Elsevier, vol. 110(1), pages 215-231.
    5. Ivashina, Victoria & Sun, Zheng, 2011. "Institutional stock trading on loan market information," Journal of Financial Economics, Elsevier, vol. 100(2), pages 284-303, May.
    6. Chen, Fan & Sanger, Gary C. & Slovin, Myron B., 2013. "Asset sales in the mutual fund industry: Who gains?," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4834-4849.
    7. Veronika Pool & Clemens Sialm & Irina Stefanescu, 2014. "It Pays to Set the Menu: Mutual Fund Investment Options in 401(k) Plans," Discussion Papers 13-021, Stanford Institute for Economic Policy Research.
    8. Manconi, Alberto & Massa, Massimo & Yasuda, Ayako, 2012. "The role of institutional investors in propagating the crisis of 2007–2008," Journal of Financial Economics, Elsevier, vol. 104(3), pages 491-518.

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