Director Connections in the Mutual Fund Industry

Abstract

This paper examines the influence corporate executives sitting on mutual fund boards exert on the investment decisions of the fund. Our results show that funds bias their holdings toward the executive’s firm. Furthermore, we find that these funds trade informatively in the executive’s firm, in stocks in the same industry segment, and outperform funds that do not have an executive on their board. However, consistent with the executive also extracting benefits, we find that the fund provides price support for the executive’s firm around negative shocks. These results suggest that the role of fund directors extends beyond formal monitoring responsibilities.

Keywords: Mutual Funds, Board of Directors, Networks, Portfolio Choice, Information Advantage, Price Support

JEL Classification: G23, G34