Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Working Knowledge
Business Research for Business Leaders
  • Browse All Articles
  • Popular Articles
  • Cold Call Podcast
  • Managing the Future of Work Podcast
  • About Us
  • Book
  • Leadership
  • Marketing
  • Finance
  • Management
  • Entrepreneurship
  • All Topics...
  • Topics
    • COVID-19
    • Entrepreneurship
    • Finance
    • Gender
    • Globalization
    • Leadership
    • Management
    • Negotiation
    • Social Enterprise
    • Strategy
  • Sections
    • Book
    • Podcasts
    • HBS Case
    • In Practice
    • Lessons from the Classroom
    • Op-Ed
    • Research & Ideas
    • Research Event
    • Sharpening Your Skills
    • What Do You Think?
  • Browse All
    The Small World of Investing: Board Connections and Mutual Fund Returns
    12 Feb 2008Working Paper Summaries

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

    by Lauren H. Cohen, Andrea Frazzini and Christopher Malloy
    How does information flow in security markets, and how do investors receive information? In the context of information flow, social networks allow a piece of information to flow along a network often in predictable paths. HBS professors Lauren Cohen and Christopher Malloy, along with University of Chicago colleague Andrea Frazzini, studied a type of dissemination through social networks tied to educational institutions, examining the information flow between mutual fund portfolio managers and senior officers of publicly traded companies. They then tested predictions on the portfolio allocations and returns earned by mutual fund managers on securities within and outside their networks. Key concepts include:
    • Social networks are important for information flow between firms and investors.
    • Across the spectrum of U.S. mutual fund portfolio managers, fund managers place larger concentrated bets on stocks they are connected to through their education network, and do significantly better on these holdings relative to non-connected holdings, and relative to connected firms they choose not to hold.
    • A portfolio of connected stocks held by managers outperforms non-connected stocks by up to 8.4 percent per year. This connection is not driven by firm, fund, school, industry, or geographic location effects, nor by a subset of the school connections (e.g., Ivy League).
    • The bulk of this premium occurs around corporate news events such as earnings announcements. This finding suggests that the excess return earned on connected stocks is driven by information flowing through the network.
    • As the information will eventually be revealed into stock prices, advance knowledge implies return predictability.
    LinkedIn
    Email

    Author 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.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: January 2008
    • HBS Working Paper Number: 08-055
    • Faculty Unit(s): Finance
      Trending
        • 25 Feb 2019
        • Research & Ideas

        How Gender Stereotypes Kill a Woman’s Self-Confidence

        • 07 Jul 2022
        • HBS Case

        How a Multimillion-Dollar Ice Cream Startup Melted Down (and Bounced Back)

        • 25 Jan 2022
        • Research & Ideas

        More Proof That Money Can Buy Happiness (or a Life with Less Stress)

        • 26 Sep 2023
        • Book

        Digital Strategy: A Handbook for Managing a Moving Target

        • 17 May 2017
        • Research & Ideas

        Minorities Who 'Whiten' Job Resumes Get More Interviews

    Lauren H. Cohen
    Lauren H. Cohen
    L.E. Simmons Professor of Business Administration
    Contact
    Send an email
    → More Articles
    Find Related Articles
    • Finance
    • Governance
    • Financial Services
    • North & Central America
    • United States

    Sign up for our weekly newsletter

    Interested in improving your business? Learn about fresh research and ideas from Harvard Business School faculty.
    This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
    ǁ
    Campus Map
    Harvard Business School Working Knowledge
    Baker Library | Bloomberg Center
    Soldiers Field
    Boston, MA 02163
    Email: Editor-in-Chief
    →Map & Directions
    →More Contact Information
    • Make a Gift
    • Site Map
    • Jobs
    • Harvard University
    • Trademarks
    • Policies
    • Accessibility
    • Digital Accessibility
    Copyright © President & Fellows of Harvard College