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  • October 2008
  • Article
  • Journal of Political Economy

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

By: Lauren Cohen, Andrea Frazzini and Christopher J. Malloy
  • Format:Print
  • | Pages:29
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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 7.8% 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.

Keywords

Financial Markets; Information Management; Social and Collaborative Networks; Announcements; Investment Portfolio; Investment Return; Investment Funds; Asset Pricing; Governing and Advisory Boards

Citation

Cohen, Lauren, Andrea Frazzini, and Christopher J. Malloy. "The Small World of Investing: Board Connections and Mutual Fund Returns." Journal of Political Economy 116, no. 5 (October 2008): 951–979. (Winner of the Barclays Global Investors Award, Best Paper in Asset Pricing, European Finance Association 2007.)
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About The Author

Lauren H. Cohen

Finance
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More from the Authors
  • Burning the Sails to Save the Ship: The Pilati Family Dilemma By: Lauren Cohen, Hao Gao, Jiawei Ye and Grace Headinger
  • Between Two Minds: The Staglin Family By: Lauren Cohen, Ronnie Stangler and Grace Headinger
  • For God, Family & Steel: Lerman Enterprises By: Lauren Cohen, Andres Aradillas Fernandez and Grace Headinger
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