Information Flows within Financial Conglomerates: Evidence from the Banks-Mutual Funds Relationship

40 Pages Posted: 16 Aug 2005 Last revised: 13 Sep 2010

Date Written: October 8, 2007


We study how information flows within financial conglomerates by analyzing the relationships between mutual funds and banks that belong to the same financial group. We investigate the effect that the lending behavior of affiliated banks has on the portfolio choice of the mutual funds that are part of the same group. We show that funds (fund families) increase their stakes in the firms that borrow from their affiliated banks in the period following the deal by far greater amounts than other unaffiliated funds (fund families). We provide evidence that this strategy is information driven. The performance of the positions of affiliated funds in the stocks of borrowing firms exceeds that of their other positions in non-borrowing stocks located in the same industry as well as that of other stocks having similar characteristics by up to 1.6% per month. Funds increase (decrease) their stock holdings in those borrowing stocks that subsequently provide positive (negative) abnormal returns, suggesting that they exploit privileged inside information not available to other market participants. This behavior is prevalent largely in funds located in close geographic proximity to their lending banks. Furthermore, it is exhibited mostly by young, small and poorly performing fund families. Our evidence points to information flows within conglomerates through informal channels such as personal acquaintances.

Keywords: Conflict of interest, mutual funds, banks

JEL Classification: G30, G23, G32

Suggested Citation

Massa, Massimo and Rehman, Zahid, Information Flows within Financial Conglomerates: Evidence from the Banks-Mutual Funds Relationship (October 8, 2007). Journal of Financial Economics (JFE), Vol. 89, No. 2, 2008. Available at SSRN:

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Zahid Rehman (Contact Author)

BlackRock ( email )

Murray House
1 Royal Mint Court
London, EC3N 4HH
United Kingdom

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