Business Ties and Information Advantage: Evidence from Mutual Fund Trading

65 Pages Posted: 18 Mar 2011 Last revised: 7 Aug 2016

Ying Duan

Simon Fraser University (SFU) - Beedie School of Business

Edith S. Hotchkiss

Boston College - Carroll School of Management

Yawen Jiao

University of California, Riverside

Date Written: August 6, 2016

Abstract

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

Duan, Ying and Hotchkiss, Edith S. and Jiao, Yawen, Business Ties and Information Advantage: Evidence from Mutual Fund Trading (August 6, 2016). Available at SSRN: https://ssrn.com/abstract=1787200 or http://dx.doi.org/10.2139/ssrn.1787200

Ying Duan

Simon Fraser University (SFU) - Beedie School of Business ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

Edith S. Hotchkiss

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Department of Finance Fulton Hall, Room 330
Chestnut Hill, MA 02467
United States
617-552-3240 (Phone)
617-552-0431 (Fax)

Yawen Jiao (Contact Author)

University of California, Riverside ( email )

Riverside, CA 92521
United States

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