The Small World of Investing: Board Connections and Mutual Fund Returns

55 Pages Posted: 27 Jun 2007 Last revised: 15 Aug 2007

Andrea Frazzini

AQR Capital Management, LLC

Christopher J. Malloy

Harvard Business School; National Bureau of Economic Research (NBER)

Lauren Cohen

Harvard Business School; National Bureau of Economic Research (NBER)

Date Written: May 2007

Abstract

This paper uses social networks to identify information transfer in security markets. We focus on connections between mutual fund managers and corporate board members via shared education networks. We find that portfolio managers place larger bets on firms they are connected to through their network, and perform significantly better on these holdings relative to their non-connected holdings. A replicating portfolio of connected stocks outperforms a replicating portfolio of non-connected stocks by up to 8.4% per year. Returns are concentrated around corporate news announcements, consistent with mutual fund managers gaining an informational advantage through the education networks. Our results suggest that social networks may be an important mechanism for information flow into asset prices.

Suggested Citation

Frazzini, Andrea and Malloy, Christopher J. and Cohen, Lauren, The Small World of Investing: Board Connections and Mutual Fund Returns (May 2007). NBER Working Paper No. w13121. Available at SSRN: https://ssrn.com/abstract=988932

Andrea Frazzini

AQR Capital Management, LLC ( email )

Two Greenwich Plaza, 3rd Floor
Greenwich, CT 06830
United States
203-742-3894 (Phone)
203-742-3394 (Fax)

HOME PAGE: http://www.econ.yale.edu/~af227/

Christopher J. Malloy

Harvard Business School ( email )

Soldiers Field Road
Baker Library 277
Boston, MA 02163
United States
617-495-4383 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lauren Cohen (Contact Author)

Harvard Business School ( email )

Rock Center 321
Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://www.people.hbs.edu/lcohen

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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