Business Connections and Informed Trading of Mutual Fund Managers
55 Pages Posted: 4 Dec 2009 Last revised: 30 Aug 2013
Date Written: August 2013
Abstract
This paper explores the hypothesis that investors gain information advantages through business connections made during prior employment. Mutual fund managers who previously worked as sell-side analysts put significantly more weight on the stocks they previously covered, and holdings of those stocks outperform their other holdings by 18% annually. These abnormal returns are concentrated around earnings announcements. However, the superior performance of covered stocks decreases significantly after the implementation of Regulation-FD or after executive changes at the covered companies. The results indicate that fund managers may have access to inside information through the business connections they made while working as analysts.
Keywords: Business connections, Mutual funds, Financial analysts
JEL Classification: G11, G14
Suggested Citation: Suggested Citation
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