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The Price of Street Friends: Social Networks, Informed Trading, and Shareholder Costs

62 Pages Posted: 15 Mar 2011 Last revised: 8 Nov 2014

Jie Cai

Drexel University

Ralph A. Walkling

Drexel University - Lebow College of Business

Ke Yang

Lehigh University

Date Written: October 26, 2014

Abstract

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.

Keywords: Social Connections, Informed Trading, Inside Information, Trading Costs

JEL Classification: G14, D82, D83

Suggested Citation

Cai, Jie and Walkling, Ralph A. and Yang, Ke, The Price of Street Friends: Social Networks, Informed Trading, and Shareholder Costs (October 26, 2014). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1785417 or http://dx.doi.org/10.2139/ssrn.1785417

Jie Cai

Drexel University ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
215-895-1755 (Phone)
215-895-2955 (Fax)

HOME PAGE: http://faculty.lebow.drexel.edu/CaiJ/

Ralph August Walkling (Contact Author)

Drexel University - Lebow College of Business ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
(215) 895-4920 (Phone)
(215) 895-6119 (Fax)

Ke Yang

Lehigh University ( email )

621 Taylor Street
Bethlehem, PA 18015
United States
6107583684 (Phone)
6107586429 (Fax)

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