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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 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.

Suggested Citation

  • Lauren Cohen & Andrea Frazzini & Christopher Malloy, 2007. "The Small World of Investing: Board Connections and Mutual Fund Returns," NBER Working Papers 13121, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13121
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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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