Business Ties and Information Advantage: Evidence from Mutual Fund Trading
65 Pages Posted: 18 Mar 2011 Last revised: 7 Aug 2016
Date Written: August 6, 2016
This paper examines whether ties to portfolio firms’ management via pension business relationships provides mutual funds with an informational advantage. Funds become related to portfolio companies when fund families serve as trustees for firms’ employee pension plans. Selling by related funds 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-sales by related funds experience lower future returns. Information appears related to firm fundamentals, as the return predictability of related funds’ selling concentrates in stocks with negative future earnings surprises. Consistent with an information based explanation, the predictive power of related funds’ selling for future returns is more pronounced when information uncertainty about the stock is higher. Our results contribute to a growing literature that shows the sources of informed trading by institutions.
Keywords: Business ties, Mutual funds, Information advantage, Employee pension plans
JEL Classification: G23, G32, J32, L14
Suggested Citation: Suggested Citation