Does Social Interaction Spread Fear among Institutional Investors? Evidence from COVID-19
60 Pages Posted: 28 Oct 2020 Last revised: 17 Oct 2022
Date Written: May 26, 2021
We study how social connectedness affected mutual fund manager trading behavior in the first half of 2020. In the first quarter during which the COVID outbreak occurred, fund managers located in or socially connected to COVID hotspots sold more stock holdings compared to a control group of unconnected managers. The economic impact of social connectedness on stock holdings was comparable to that of COVID hotspots and was elevated among “epicenter” stocks most susceptible to the pandemic shock. In the second quarter, social interaction had an overall negative effect on fund performance, but this effect depended on manager skill; unskilled managers who were connected to the hotspots underperformed, while skillful managers suffered no deleterious effect. Our evidence suggests that social connections can intensify salience bias for all but the most skilled institutional investors, and policy makers should be wary of the destabilizing role of social networks during market downturns.
Keywords: social networks, Facebook social connectedness index, COVID-19, salience bias, institutional investors
JEL Classification: G01, G11, G14, G41
Suggested Citation: Suggested Citation