Friendly Investing and Information Sharing in the Asset Management Industry

Abstract

Do asset managers engage in friendly investing to obtain privileged investment information? We test this hypothesis in the context of mutual fund connections to financial groups. Using brokers as the source of connections, we find that funds overweight the stock of connected financial groups and side with management in contested votes. We also find that fund performance improves with the extent of friendly investing. The improvement stems from trading the stock of companies that borrow from connected financial groups. Brokerage commissions do not drive the results. Our findings suggest that funds can obtain valuable information by acting as friendly shareholders.

Keywords: Asset management, business ties, financial conglomerates, mutual funds, brokerage firms, price support, financial stability

JEL Classification: G01, G11, G21, G23, G24, G28