It’s a Small World: The Importance of Social Connections with Auditors to Mutual Fund Managers’ Portfolio Decisions

58 Pages Posted: 28 Dec 2019 Last revised: 1 Apr 2020

See all articles by Yangyang Chen

Yangyang Chen

City University of Hong Kong (CityUHK) - Faculty of Business

Jun Huang

Shanghai University of Finance and Economics

Ting Li

Shanghai University of International Business and Economics

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Date Written: March 31, 2020

Abstract

We examine the impact of social connections between mutual fund managers and auditors of public firms on mutual fund stockholdings. We find that mutual funds whose managers are socially connected with firm auditors hold more shares of these firms. In cross-sectional results consistent with expectations, we find that the effect of social connections on mutual fund stockholdings is more pronounced when the social connections are stronger, for small audit firms, and for public firms with greater business opacity, stock price synchronicity, and systematic risk. We further document that mutual funds with socially connected auditors engage more in informed trading and generate superior portfolio returns. In compensation, connected auditors benefit from more audit business and higher audit and non-audit fees from mutual funds and public firms. Our evidence implies information transfer from auditors to mutual fund managers through their social connections, which improves mutual fund portfolio decisions.

Keywords: Social Connections, Auditor Incentives, Mutual Fund Stock-holding

JEL Classification: G11, G23, M42

Suggested Citation

Chen, Yangyang and Huang, Jun and Li, Ting and Pittman, Jeffrey A., It’s a Small World: The Importance of Social Connections with Auditors to Mutual Fund Managers’ Portfolio Decisions (March 31, 2020). Available at SSRN: https://ssrn.com/abstract=3499617 or http://dx.doi.org/10.2139/ssrn.3499617

Yangyang Chen (Contact Author)

City University of Hong Kong (CityUHK) - Faculty of Business ( email )

Tat Chee Avenue, Kowloon, Hong Kong SAR
Hong Kong
China

Jun Huang

Shanghai University of Finance and Economics ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

Ting Li

Shanghai University of International Business and Economics ( email )

No. 1900, Wenxiang Road
Shanghai, 201620
China

Jeffrey A. Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

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