Can Alumni Relations between Fund Managers and Companies’ Management Exacerbate the Stock Price Volatility?

Abstract

The private information trading between fund managers and listed companies’ executives based on alumni relations may avoid fair disclosure principal and aggravate stock price volatility. In the capital market, alumni relations have been reduced to a profit-making tool for some fund managers. Therefore, it is of great practical significance to systematically analyze and discuss how alumni relations affect information disclosure and stock price fluctuations of listed companies. This paper systematically examines the adverse impact of the alumni relations between fund managers and listed companies’ executives on information disclosure and stock price stability in the capital market. Taking the quarterly data of China Open-end Fund Portfolio from 2003 to 2016 as the research sample, this paper finds that private information trading between fund managers and listed companies’ executives based on alumni relations would increase the information gap between different investors and exacerbate stock price volatility. Further analysis finds that the existence of alumni relations would lead to short-termism of fund managers. For example, the holding period would be much shorter, the turnover rate would be much higher and professional investors without alumni relations would be crowded out. These results show that the alumni relations between fund managers and listed companies’ executives would adversely affect the stability of the capital market. This paper also finds that private information trading between fund managers and listed companies’ executives based on alumni relations is mainly reflected in the trading of good news. Taking listed companies’ earnings announcement as a shock, we find that fund managers would significantly change their shareholding position before listed companies’ announcement of financial reports. If the profit of this year is bigger than the previous year （good news）, then fund managers would increase their holding of the stock. Further analysis indicates that the significant impact of alumni relations on private information trading and stock price fluctuations is only established in the sub-sample of good news. The above results show that the private information trading between fund managers and listed companies’ executives based on alumni relations is mainly reflected in the trading of good news, which also leads to particularly violent price fluctuations in these stocks. This paper indicates that if we cannot eliminate the influence of private information trading between fund managers and listed companies’ executives based on alumni relations, we cannot guarantee the effective implementation of fair information disclosure. These findings may provide some enlightening significance for the supervision work of the CSRC and related government agencies.