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The relevance of broker networks for information diffusion in the stock market

Author

Listed:
  • Maggio, Marco Di
  • Franzoni, Francesco
  • Kermani, Amir
  • Sommavilla, Carlo

Abstract

This paper shows that the network of relationships between brokers and institutional investors shapes information diffusion in the stock market. Central brokers gather information by executing informed trades, which is then leaked to their best clients. After large informed trades, other institutional investors are significantly more likely to execute similar trades through the same broker, allowing them to capture returns that are twice as large as their normal trading performance. Also indicative of information leakage, the clients of the broker employed by activist investors to execute their trades buy the same stocks just before the filing of the 13D.

Suggested Citation

  • Maggio, Marco Di & Franzoni, Francesco & Kermani, Amir & Sommavilla, Carlo, 2019. "The relevance of broker networks for information diffusion in the stock market," Journal of Financial Economics, Elsevier, vol. 134(2), pages 419-446.
    • Handle: RePEc:eee:jfinec:v:134:y:2019:i:2:p:419-446
    DOI: 10.1016/j.jfineco.2019.04.002
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    More about this item

    Keywords

    Broker networks; Institutional investors; Asset prices; Information leakage;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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