Friends in Need are Friends Indeed: An Analysis of Social Ties between Financial Analysts and Mutual Fund Managers

Abstract

This study examines how social ties developed between financial analysts and mutual fund managers in the workplace lead to biased behavior. We show that after a mutual fund manager builds a significant position in a stock, analysts socially connected with her issue more optimistic recommendations for the stock than unconnected analysts. This effect persists after controlling for other relationships between the analyst and the fund manager, such as ownership of the fund by the brokerage, or the fund’s allocation of trading commissions to the analyst’s brokerage. In return for an analyst’s favor, a mutual fund manager is more likely to cast her star analyst vote in favor of that analyst. In addition, the fund manager’s fund company is also more likely to allocate its trading to the connected analyst’s brokerage. Collectively, these results suggest that social ties play an important role in the business decisions of financial analysts and mutual fund managers.