Week 6 - Pool, V. K., Stoffman, N., and Yonker, S. E. (2015). The people in your neighborhood: Social interactions and mutual fund portfolios.

Question 1

What is the main idea of this paper?

Answer 1

• Social networks: network structures composed of nodes (usually people or institutions) that are connected through various social relationships
• Do fund managers trade stocks that they learn via their social networks?

Question 2

What are the main findings of this paper?

Answer 2

• Educational networks: Mutual fund managers who went to HBS put more money in companies headed by HBS classmates and do surprisingly well on these investments
• Neighbourhood network: Holdings and trades of fund managers who work in the same city are correlated
• Social hypothesis: information travels through informal person-to-person networks
• Alternative community effects: Exposure to same media outlets, same corp. executives during roadshows,
• Similar preference hypothesis: Living in the same area may have similar preferences in respect to their stock selection
• Research questions:
  o Social interactions influence holdings?
  o Are neighbour networks relevant?
  o Can we disentangle social interactions from community and other similar preference effects?
• Measure: driving distance between fund managers (normalized for population density)
• Introduce 2 dummy variables to measure if they live within 1 normalized mile, or 2.3 normalized mile, to get the chance of meeting and exchanging information
• Coefficient of neighbours indicates that there is a significant effect on fund holdings
• Control variables:
  o Having common managers results in the highest overlap
  o Matching on fund style is important; fund family overlap is also significant
  o Living in the same city and same media exposure is also important
• For buying, the results are more significant; for selling, not so much
• Manager characteristics important in the overlap:
  o Similar age, similar ethnic background, experience, college education (basically nature vs. nurture)
• Preference hypothesis predictions: overlap is constant
• Social interactions hypothesis: it takes time to build trust and share ideas
• Mutual fund portfolios are diverse, hence information sharing is not costly
• The restrictions for mutual funds further decrease costs associated with information sharing
• There is a quid pro quo effect too
• Relation between neighbour performance and stock characteristics:
  o Lower informational efficiency leads to more opportunities
  o Neighbour funds more likely to cooperate on opaque stocks
  o L/S equity strategy with hard-to-research stocks provides far greater returns for neighbours
• Neighbour trading and past performance:
  o Past successful idea sharing results in more idea coordination

Question 3

What is the conclusion?

Answer 3

• The abnormal portfolio overlap is higher for close neighbours than distant ones
• Overlap is motivated by social interactions not by the same preferences (control variables)
• Institutions are also subject to behavioural biases (overconfidence, limited attention)
• Institutional idea generation: past performance, mass media, social interactions