Friends in Need are Friends Indeed: The Effects of Social Ties between Financial Analysts and Mutual Fund Managers in China

Abstract

We investigate how social ties developed at workplace between financial analysts and mutual fund managers in China lead to their biased behavior. We show that, for stocks held by mutual funds, analysts socially connected with the fund managers issue more optimistic recommendations than unconnected analysts. This effect holds after controlling for other ties between analysts and fund managers such as ownership of analysts’ brokerages in the funds or allocation of trading commission fees by the funds to the analysts’ brokerages. In return, analysts are more likely to be voted as star analysts when a larger proportion of voters are connected fund managers. Analysts’ brokerages are also likely to obtain larger trading commission fees from funds with connected managers. Collectively, these results suggest that social ties play an important role in the business decisions of financial analysts and mutual fund managers.