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

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  • Massa, Massimo
  • Rehman, Zahid

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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  • Massa, Massimo & Rehman, Zahid, 2008. "Information flows within financial conglomerates: Evidence from the banks-mutual funds relation," Journal of Financial Economics, Elsevier, vol. 89(2), pages 288-306, August.
  • Handle: RePEc:eee:jfinec:v:89:y:2008:i:2:p:288-306
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    9. Leano,Miguel & Pedraza Morales,Alvaro Enrique, 2016. "Informed trading in business groups, ownership concentration, and market liquidity," Policy Research Working Paper Series 7688, The World Bank.
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    11. 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.
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    17. Gargano, Antonio & Rossi, Alberto G. & Wermers, Russ, 2015. "The freedom of information act and the race towards information acquisition," CFR Working Papers 16-02, University of Cologne, Centre for Financial Research (CFR).
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    19. Ivashina, Victoria & Sun, Zheng, 2011. "Institutional stock trading on loan market information," Journal of Financial Economics, Elsevier, vol. 100(2), pages 284-303, May.
    20. Luo, Mancy, 2017. "Essays in financial intermediation and political economy," Other publications TiSEM 146f40d3-6c89-4c6d-8fea-1, Tilburg University, School of Economics and Management.
    21. Pasquale Massimo Picone & Giovanni Battista Dagnino, 2016. "Revamping research on unrelated diversification strategy: perspectives, opportunities and challenges for future inquiry," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 20(3), pages 413-445, September.
    22. Grigori Erenburg & Janet Kiholm Smith & Richard Smith, 2015. "Does Institutional Ownership Promote the Transformation of Underperforming Firms?," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 5(04), pages 1-40, December.

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