Information Flows within Financial Conglomerates: Evidence from the Banks-Mutual Funds Relationship

Abstract:     
We study how information flows within financial conglomerates by analyzing the relationships between mutual funds and banks which belong to the same financial group. We investigate the effect that the lending behavior of affiliated banks has on the portfolio choice of the mutual funds that are part of the same group. We show that fund (fund families) increase their stakes in the firms that borrow from their affiliated banks in the period following the deal by far greater amounts than other unaffiliated funds (fund families). We provide evidence that this strategy is information driven. The performance of the positions of affiliated funds in the stocks of borrowing firms is superior to that of their other positions in non-borrowing stocks located in the same industry as well as other stocks having similar characteristics. Funds increase (decrease) their stock holdings in those borrowing stocks which subsequently provide positive (negative) abnormal returns, suggesting that they exploit privileged inside information not available to other market participants.

Keywords: Conflict of interest, mutual funds, banks

JEL Classifications: G30, G23, G32

Working Paper Series