The Relevance of Broker Networks for Information Diffusion in the Stock Market

74 Pages Posted: 28 Oct 2016 Last revised: 10 Jun 2017

Marco Di Maggio

Harvard Business School; National Bureau of Economic Research (NBER)

Francesco A. Franzoni

USI Lugano; Swiss Finance Institute

Amir Kermani

University of California, Berkeley; National Bureau of Economic Research (NBER)

Carlo Sommavilla

Università della Svizzera italiana (USI), Lugano; Swiss Finance Institute

Multiple version iconThere are 3 versions of this paper

Date Written: June 8, 2017

Abstract

This paper shows that the network of relationships between brokers and institutional investors shapes the information diffusion in the stock market. We exploit trade-level data to show that central brokers gather information by executing informed trades, which is then leaked to their best clients. We show that after large informed trades, a significantly higher volume of other institutional investors execute similar trades through the same broker, allowing them to capture higher returns in the first few days after the initial trade. In contrast, we find that when the informed asset manager is affiliated with the broker, such imitation does not occur. Similarly, we show that the clients of the broker employed by activist investors to execute their trades tend to buy the same stocks just before the filing of the 13D. This evidence also suggests that an important source of alpha for fund managers is the access to better connections rather than superior skill.

Keywords: broker networks, institutional investors, asset prices, information

JEL Classification: G12, G14, G24

Suggested Citation

Di Maggio, Marco and Franzoni, Francesco A. and Kermani, Amir and Sommavilla, Carlo, The Relevance of Broker Networks for Information Diffusion in the Stock Market (June 8, 2017). Swiss Finance Institute Research Paper No. 16-63; Harvard Business School Finance Working Paper. Available at SSRN: https://ssrn.com/abstract=2860118

Marco Di Maggio

Harvard Business School ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Francesco A. Franzoni (Contact Author)

USI Lugano ( email )

Via G. Buffi 13
Lugano, 6904
Switzerland

Swiss Finance Institute

Switzerland

Amir Kermani

University of California, Berkeley ( email )

2220 Piedmont Ave
Berkeley, CA 94720
United States

HOME PAGE: http://faculty.haas.berkeley.edu/amir/research/research.html

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Carlo Sommavilla

Università della Svizzera italiana (USI), Lugano; Swiss Finance Institute ( email )

c/o Università della Svizzera Italiana
Via G. Buffi 13
CH-6904 Lugano
Switzerland

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