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The Relevance of Broker Networks for Information Diffusion in the Stock Market

Marco Di Maggio, Francesco A. Franzoni, Amir Kermani and Carlo Sommavilla
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Marco Di Maggio: Harvard Business School and National Bureau of Economic Research (NBER)
Francesco A. Franzoni: University of Lugano and Swiss Finance Institute
Amir Kermani: University of California and National Bureau of Economic Research (NBER)
Carlo Sommavilla: University of Lugano and Swiss Finance Institute

No 16-63, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper shows that the network of relationships between brokers and institutional investors shapes the information diffusion in the stock market. We exploit trade-level data to show that trades channeled through central brokers earn significantly positive abnormal returns. This result is not due to differences in the investors that trade through central brokers or to stocks characteristics, as we control for this heterogeneity; nor is it the result of better trading execution. We find that a key driver of these excess returns is the information that central brokers gather by executing informed trades, which is then leaked to their best clients. We show that after large informed trades, a significantly higher volume of other investors execute similar trades through the same central broker, allowing them to capture higher returns in the first few days after the initial trade. The best clients of the broker executing the informed trade, and the asset managers affiliated with the broker, are among the first to benefit from the information about order flow. This evidence also suggests that an important source of alpha for fund managers is the access to better connections rather than superior skill.

Keywords: broker networks; institutional investors; asset prices; information (search for similar items in EconPapers)
JEL-codes: G12 G14 G24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-mst and nep-net
Date: 2016-10
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