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

Journal of Accounting Research, Forthcoming

77 Pages Posted: 28 Dec 2019 Last revised: 3 Aug 2021

See all articles by Yangyang Chen

Yangyang Chen

City University of Hong Kong (CityUHK) - Department of Accountancy

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: July 26, 2021

Abstract

We find that mutual funds whose managers are socially connected with firm auditors hold more shares of these firms and generate superior portfolio returns. Cross-sectional results reveal that the relation between social connections and mutual fund stockholdings is more pronounced: when the social connections are stronger; when the auditor is in a better position or has stronger incentives to acquire private information; when the fund manager exercises more power; for small audit firms; for auditors in areas with poor investor protection; and for public firms with greater business opacity or private information. Other results are consistent with fund managers electing to schedule their corporate site visits to coincide with the fieldwork of their connected auditors, as would be expected if fund managers time their visits to meet with these auditors to facilitate information transfer. Additionally, we observe associations between fund trading prior to earnings surprises and audit opinions, and the presence of social connections between fund managers and firm auditors. Finally, we show that mutual funds and firms in which they invest tend to appoint connected auditors and pay them higher fees. Collectively, we document empirical patterns that would arise if socially connected auditors and mutual fund managers share information.

Keywords: Social Connections, Auditor Incentives, Mutual Fund Stockholding

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 (July 26, 2021). Journal of Accounting Research, Forthcoming, 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) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
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)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
195
Abstract Views
1,171
rank
191,036
PlumX Metrics