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The Small World of Investing: Board Connections and Mutual Fund Returns

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  • 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 connected firms and perform significantly better on these holdings relative to their nonconnected holdings. A replicating portfolio of connected stocks outperforms nonconnected stocks by up to 7.8 percent per year. Returns are concentrated around corporate news announcements, consistent with portfolio managers gaining an informational advantage through the education networks. Our results suggest that social networks may be important mechanisms for information flow into asset prices. (c) 2008 by The University of Chicago. All rights reserved..

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 116 (2008)
Issue (Month): 5 (October)
Pages: 951-979

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Handle: RePEc:ucp:jpolec:v:116:y:2008:i:5:p:951-979

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