The Price of Street Friends: Social Networks, Informed Trading, and Shareholder Costs
Ralph A. Walkling
Drexel University - Lebow College of Business
November 30, 2012
Prior research reports increased stock transaction costs when informed trading is present. Recent studies suggest the transfer of privileged information via social ties. Combing these two literature streams, we document a significant, positive relation between a company's trading costs and the Wall Street social ties of its executives and directors. Social ties based on education, leisure activities, local ties, and ties to individuals responsible for trading have stronger effects. Exogenous severance of ties reduces trading costs and trading activities by connected parties. Firms with more ties to Wall Street exhibit reduced market reaction to official announcements of earnings and acquisitions.
Number of Pages in PDF File: 56
Keywords: Social Connections, Informed Trading, Inside Information, Trading Costs
JEL Classification: G14, D82, D83working papers series
Date posted: March 15, 2011 ; Last revised: December 14, 2012
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