Does Social Interaction Spread Fear among Institutional Investors? Evidence from COVID-19
29 Pages Posted: 28 Oct 2020 Last revised: 30 Oct 2020
Date Written: October 27, 2020
We study how social connectedness affected fund manager stock holdings during the COVID-19 outbreak in the first quarter of 2020. Fund managers located in or socially connected to COVID hotspots sold more stock holdings during the quarter compared to a control group of unconnected managers. The economic impact of social connectedness on stock holdings is comparable to that of COVID hotspots. However, such reductions are panic driven as the unloaded stocks rebounded sharply in the subsequent quarter. Our evidence suggests that social connections can intensify salience bias for 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
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