62 Pages Posted: 15 Mar 2011 Last revised: 8 Nov 2014
Date Written: October 26, 2014
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: 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