Friends in Need are Friends Indeed: An Analysis of Social Ties between Financial Analysts and Mutual Fund Managers

58 Pages Posted: 1 Nov 2016 Last revised: 25 Jan 2018

Zhaoyang Gu

Chinese University of Hong Kong - School of Accountancy

Guangqing Li

China Galaxy Securities

Zengquan Li

Shanghai University of Finance and Economics - School of Accountancy

Yong George Yang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration

Date Written: October 31, 2016

Abstract

We examine how hometown, school, and workplace social ties between financial analysts and mutual fund managers affect their business decisions. We show that a fund manager is more likely to hold stocks covered by analysts with whom she is socially connected and that she also makes higher profits from these holdings. The holding returns are higher for more opaque firms. In return, a fund manager tends to cast her star analyst votes in favor of her connected analysts and her fund company is more likely to allocate trading commissions to her connected analysts’ brokerages. Additional tests indicate that analysts more actively acquire information (through conducting corporate site visits) and issue more optimistically biased recommendations for stocks held by fund managers with whom they are connected. Overall, our results illustrate the influence of social networks on the behaviors of analysts and fund managers.

Suggested Citation

Gu, Zhaoyang and Li, Guangqing and Li, Zengquan and Yang, Yong George, Friends in Need are Friends Indeed: An Analysis of Social Ties between Financial Analysts and Mutual Fund Managers (October 31, 2016). Available at SSRN: https://ssrn.com/abstract=2861731 or http://dx.doi.org/10.2139/ssrn.2861731

Zhaoyang Gu

Chinese University of Hong Kong - School of Accountancy ( email )

Shatin, N.T.
Hong Kong

Guangqing Li

China Galaxy Securities ( email )

Tower C, Corporate Square
35 Finance Street
Beijing, 100033
China

Zengquan Li

Shanghai University of Finance and Economics - School of Accountancy ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

Yong George Yang (Contact Author)

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration ( email )

Shatin, N.T.
Hong Kong

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