Business Ties and Information Advantage: Evidence from Mutual Fund Trading
University of Alberta - Department of Finance and Statistical Analysis
Edith S. Hotchkiss
Boston College - Carroll School of Management
University of California, Riverside
June 7, 2013
This paper examines whether mutual fund trading reflects an informational advantage obtained through their families’ pension business ties. Funds become related to their portfolio firms when fund families serve as trustees for firms’ employee pension plans. Related funds’ selling is more likely to be motivated by an information advantage than their buying, because the latter is heavily influenced by the desire to secure pension inflows. We find that stocks with larger net-sells by related funds experience lower future returns. The predictive power of related funds’ selling for future returns is more pronounced when information uncertainty about the stock is higher. Information appears related to firm fundamentals, as the return predictability of related funds’ selling concentrates in stocks with negative future earnings surprises. Our results complement a growing literature including Coval and Moskowitz (1999, 2001) and Cohen et al. (2008), that connections are important mechanisms for information flow into asset prices.
Number of Pages in PDF File: 46
Keywords: Business ties, Mutual funds, Information advantage, Employee pension plans
JEL Classification: G23, G32, J32, L14working papers series
Date posted: March 18, 2011 ; Last revised: June 11, 2013
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