The Price of Street Friends: Social Networks, Informed Trading, and Shareholder Costs
Ralph A. Walkling
Drexel University - Lebow College of Business
October 26, 2014
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
Recent studies suggest the transfer of privileged information via social ties but do not explicitly examine the cost of these ties to shareholders. We document a significant, positive relation between stock transaction costs and a company’s social ties to the investment community. Social ties based on education and leisure activities, stronger ties, and ties to individuals responsible for trading have greater effects. Using investment connection deaths as natural experiments, we document that exogenous severance of ties reduces trading costs and trading activities by connected parties. Our evidence illustrates an important and previously undocumented consequence of social ties.
Number of Pages in PDF File: 62
Keywords: Social Connections, Informed Trading, Inside Information, Trading Costs
JEL Classification: G14, D82, D83
Date posted: March 15, 2011 ; Last revised: November 8, 2014
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