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School ties and investing
Filed in archive markets by leon on June 27, 2007
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More evidence that it's not what you know but who you know. A new study shows that mutual fund managers invest more money in companies that are run by people with whom they went to college or graduate school than in companies where they have no such connections. The interesting part is that these investments do better than the other investments.

Now, there could be two explanations for this. One is that they know their old classmates, now executives, really well, including their capabilities. The second is that these executives are passing along information to their old classmates, the fund managers. And the study finds some evidence to support that.

The study, The small world of investing board connections and mutual fund returns examined the degrees of separation between fund managers and executives. They found some strong connections, including them attending the same university at the same school at the same time. The most common breeding ground was Harvard.

The study found that on average, investments in companies where there was no connection returned just 11.7 percent a year before fees. But when a fund manager attended school with an executive, the return was 20.1 percent a year.

The authors do not rule out the possibility that executives are passing along information.

"We find that the bulk of this premium occurs around corporate news events such as earnings announcements, lending support to the hypothesis that the excess return on connected stocks is driven by information flowing through the network."



Permalink: School ties and investing
Tags: mutual  funds  school  ties  The  small  world  of  investing  board  connections  and  mutual  fund  returns  corp 
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