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Social Influence and Networks

Paper Session

Saturday, Jan. 7, 2023 10:15 AM - 12:15 PM (CST)

Sheraton New Orleans, Rhythms II
Hosted By: American Finance Association
  • Chair: Lin Peng, CUNY-Baruch College and University of Cambridge

Hidden Alpha

Manuel Ammann
,
University of St. Gallen
Alexander Cochardt
,
Harvard University and University of St. Gallen
Lauren Cohen
,
Harvard University
Stephan Heller
,
Harvard University and University of St. Gallen

Abstract

Using the setting of financial agents, we explore the importance of hidden connections relative to all other network connections. We find that hidden connections are those associated with the largest and most significant abnormal returns accruing to fund managers—on average 135 basis points per month (over 16% alpha per year, t-stat = 3.54) across the universe of mutual funds and public firms. This is relative to insignificant abnormal returns accruing on average to all other trades, including those to trades of “visible” connections. The hidden connection premium does not appear to be driven by endogenous selection or familiarity, as fund managers seem to be correctly timing when to hold (and when to avoid) the firm officers to whom they are tied. Further, the more hidden the connection is, the more valuable the information that appears to be associated with the trading across it. This hidden connection premium exists across industries, styles, time periods, and firm types; remaining strong and significant through the present day. More broadly, our findings highlight the importance of missing nodes and hidden edges when attempting to understand the true nature of shock propagation in complex network systems.

It's Not Who You Know - It's Who Knows You: Employee Social Capital and Firm Performance

DuckKi Cho
,
Peking University
Lyungmae Choi
,
City University of Hong Kong
Michael Hertzel
,
Arizona State University
Jessie Jiaxu Wang
,
Arizona State University and Federal Reserve Board

Abstract

We show that the social capital embedded in employees’ networks contributes to firm value and provide evidence on the mechanisms. Using novel, individual-level network data, we measure a firm’s social capital derived from employees’ connections with external stakeholders. The directed nature of connections allows for identifying whether one party in a connection is a more valued contact. Results show that firms with more employee social capital perform better; the positive effect stems primarily from employees being valued by others. We provide causal evidence exploiting the enactment of a government regulation that imparted a negative shock to networking with specific sectors.

The Economic Impact of Liquidity Crises: Evidence from the Russian Payment System

Dmitry Livdan
,
University of California-Berkeley
Norman Schuerhoff
,
University of Lausanne and Swiss Finance Institute
Vladimir Sokolov
,
Higher School of Economics

Abstract

Liquidity crises in the financial system can disrupt firm-to-firm payments for goods and services, rendering money illiquid. We show both theoretically and empirically that money illiquidity severely impairs economic activity through firms’ direct loss of payment access and payment externalities that amplify the initial shock. The Russian banking panic of 2004 provides a unique setting to study the economic impact of payment disruptions originating from foreclosure of two mid-sized banks. Using 133 million transactions from the payment system, we document persistent and asymmetric disruptions in firm-to-firm payments, hurting money-sending firms more than money-receiving firms. Payment shocks originating at a firm’s own/supplier/customer bank reduces output by 2.5%/3.1%/7.0%. Real resilience, as captured by the elasticity of a firm’s eigenvector centrality, dampens shock pass-through by 4.1%/1.5% for upstream/downstream firms.

Do Teams Alleviate or Exacerbate Behavioral Biases? Evidence from Extrapolation Bias in Mutual Funds

Ricardo Barahona
,
Bank of Spain
Stefano Cassella
,
Tilburg University
Kristy A.E. Jansen
,
Tilburg University

Abstract

Whether teams attenuate or exacerbate behavioral biases which are pervasive at the
individual level is an open question. We answer this question using the mutual fund
industry as a laboratory. We focus on how return extrapolation is transmitted from
individual fund managers to the team-managed funds they join. We show that teams
attenuate the influence of extrapolation bias on funds' trading behavior. This attenuation
is not due to differences in investment experience, compensation, workload, and investment styles between solo-managed and team-managed funds. Rather, the elicitation of team members' inner cognitive reflection can be responsible for teams' reduction in behavioral biases.

Discussant(s)
Dexin Zhou
,
CUNY-Baruch College
Alberto G. Rossi
,
Georgetown University
Ernest Liu
,
Princeton University
Jun Yang
,
Indiana University
JEL Classifications
  • G0 - General