Friends in Need are Friends Indeed: An Analysis of Social Ties between Financial Analysts and Mutual Fund Managers
67 Pages Posted: 1 Nov 2016 Last revised: 9 Dec 2016
Date Written: October 31, 2016
We examine how social ties developed between financial analysts and mutual fund managers in schools and at workplaces affect their decisions in their business interactions. We show that fund managers are more likely to hold stocks covered by socially connected analysts and also make higher profits from these holdings. The holding return is higher for more opaque firms. These results are likely attributable to more corporate site visits and more optimistically biased recommendations by connected analysts for stocks held by the fund managers. In return, fund managers tend to cast their star analyst votes in favor of their connected analysts and their fund companies are more likely to allocate trading commissions to the connected analysts’ brokerages. The results are robust to various change analyses.
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