Article | Journal of Finance | August 2010

Sell-Side School Ties

by Lauren H. Cohen, Christopher J. Malloy and Andrea Frazzini

Abstract

We study the impact of social networks on agents' ability to gather superior information about firms. Exploiting novel data on the educational backgrounds of sell side equity analysts and senior officers of firms, we test the hypothesis that analysts' school ties to senior officers impart comparative information advantages in the production of analyst research. We find evidence that analysts outperform on their stock recommendations when they have an educational link to the company. A simple portfolio strategy of going long the buy recommendations with school ties and going short buy recommendations without ties earns returns of 6.60% per year. We test whether Regulation FD, targeted at impeding selective disclosure, constrained the use of direct access to senior management. We find a large effect: pre-Reg FD the return premium from school ties was 9.36% per year, while post-Reg FD the return premium was nearly zero and insignificant. In contrast, in an environment that did not change selective disclosure regulation (the U.K.), the analyst school-tie premium has remained large and significant over the entire sample period.

Keywords: Investment Return; Investment Portfolio; Corporate Disclosure; Governing Rules, Regulations, and Reforms; Knowledge Acquisition; Social and Collaborative Networks;

Citation:

Cohen, Lauren H., Christopher J. Malloy, and Andrea Frazzini. "Sell-Side School Ties." Journal of Finance 65, no. 4 (August 2010): 1409–1437. (Winner of Smith Breeden Prize for the Best Paper Published in the Journal of Finance in Asset Pricing (Distinguished Paper) 2010.)