Does Social Interaction Spread Fear Among Institutional Investors? Evidence from Coronavirus Disease 2019

Shiu-Yik Au (), Ming Dong () and Xinyao Zhou ()
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Shiu-Yik Au: Asper School of Business, University of Manitoba, Winnipeg, Manitoba R3T 5V4, Canada
Ming Dong: Schulich School of Business, York University, Toronto, Ontario M3J 1P3, Canada
Xinyao Zhou: Faculty of Business and Information Technology, Ontario Tech University, Oshawa, Ontario L1G 0C5, Canada

Management Science, 2024, vol. 70, issue 4, 2406-2426

Abstract: We study how social connectedness affected active mutual fund manager trading behavior in the first half of 2020. In the first quarter during which the coronavirus disease 2019 (COVID-19) outbreak occurred, fund managers located in or socially connected to COVID-19 hotspots sold more stock holdings compared with a control group of unconnected managers. The economic impact of social connectedness on stock holdings was comparable with that of COVID-19 hotspots and was elevated among “epicenter” stocks most susceptible to the pandemic shock. In the second quarter, social interaction had an overall negative effect on fund performance, but this effect depended on manager skill; unskilled managers who were connected to the hotspots underperformed, whereas skillful managers suffered no deleterious effect. Our evidence suggests that social connections can intensify salience bias for all but the most skilled institutional investors, and policy makers should be wary of the destabilizing role of social networks during market downturns.

Keywords: social networks; Facebook social connectedness index; COVID-19; salience bias; institutional investors (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:4:p:2406-2426

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