Does It Pay to be Socially Connected with Wall Street Brokerages? Evidence from Cost of Equity

Journal of Corporate Finance, Forthcoming

85 Pages Posted: 24 Mar 2021

See all articles by Thanh Son Luong

Thanh Son Luong

University of Sydney Business School

Buhui Qiu

University of Sydney Business School; Financial Research Network (FIRN)

Ava Wu

The University of Sydney

Date Written: March 19, 2021

Abstract

We show that social connections between a firm’s executives and directors and brokerages that follow the firm decrease the firm’s cost of equity. We use quasi-natural experiments to address endogeneity concerns and find that the uncovered effect of firm-brokerage social connections on cost of equity is likely causal. The effect is found to be more pronounced for firms with more soft information, opaque information environments, tight financial constraints, weak corporate monitoring, or high executive equity ownership. Further, consistent with the evidence on cost of equity, we find that firm-brokerage social connections reduce SEO underpricing, decrease information asymmetry in stock markets, and improve the firm’s equity valuation.

Keywords: Firm-brokerage Social Connections, Cost of Equity, Information Asymmetry

JEL Classification: G10, G30, G32

Suggested Citation

Luong, Thanh Son and Qiu, Buhui and Wu, Ava, Does It Pay to be Socially Connected with Wall Street Brokerages? Evidence from Cost of Equity (March 19, 2021). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3811195

Thanh Son Luong

University of Sydney Business School ( email )

University of Sydney
Sydney, NSW 2006
Australia

Buhui Qiu (Contact Author)

University of Sydney Business School ( email )

Room 513, The Codrington Building
The University of Sydney
Sydney, NSW 2006
Australia
+61 2 9036 6435 (Phone)
+61 2 9351 6461 (Fax)

HOME PAGE: http://sydney.edu.au/business/staff/buhuiq

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Ava Wu

The University of Sydney

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