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

By Lauren H. Cohen, Andrea Frazzini, Christopher J. Malloy. Journal of Political Economy, 2007

1,285 citations recorded by the source corpus.

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 connected firms and perform significantly better on these holdings relative to their nonconnected holdings. A replicating portfolio of connected stocks outperforms nonconnected stocks by up to 7.8 percent per year. Returns are concentrated around corporate news announcements, consistent with portfolio managers gaining an informational advantage through the education networks. Our results suggest that social networks may be important mechanisms for information flow into asset prices.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/1dc6bacfd69b935ceb81782e90fd8beb6eb03710

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Citations in the corpus

Social Networks in the Boardroom (2013, neutral): “Cohen, Frazzini, and Malloy (2008) find that mutual fund managers trade more on the stocks of firms whose directors they are connected with and that these trades are profitable.”
The cost of friendship (2016, background): “3 joint decisions in a timely and productive manner (e.g., Ingram and Roberts, 2000; McPherson et al., 2001; Cohen et al., 2008; Gompers and Xuan, 2010).”
Network centrality and pension fund performance (2015, positive): “Our findings are related to studies on networks, such as Cohen, Frazzini, and Malloy (2008), who find that social networks facilitate information transfer in securities markets, and that mutual fund managers’ connections with corporate board members (identified through education) help them better…”
Corporate Finance Policies and Social Networks (2017, neutral): “Such definition of education network is similar but even more restricted than the one used in other papers (see Cohen, Frazzini, and Malloy (2008), 7 Active role means that the role description needs to be more than just " members " .”
Resources or Power? Implications of Social Networks on Compensation and Firm Performance (2012, background): “, 2007) and the relation between board memberships and funds’ return (Cohen et al., 2008).”
Do school ties between auditors and client executives influence audit outcomes (2016, positive): “Consistent with these arguments, prior studies find that social networks enhance value in mutual fund investments (Cohen et al., 2008),”