Abstract: Theories based on incomplete contracting suggest that small organizations may do better than large organizations in activities that require the processing of soft information. We explore this idea in the context of bank lending to small firms, an activity that is typically thought of as relying heavily on soft information. We find that large banks are less willing than small banks to lend to informationally "difficult" credits, such as firms that do not keep formal financial records. Moreover, controlling for the endogeneity of bank-firm matching, large banks lend at a greater distance, interact more impersonally with their borrowers, have shorter and less exclusive relationships, and do not alleviate credit constraints as effectively. All of this is consistent with small banks being better able to collect and act on soft information than large banks.

This paper investigates the performance and capital inflows of private equity partnerships. Average fund returns (net of fees) approximately equal the S&P 500 although there is substantial heterogeneity across funds. Returns persist strongly across different funds raised by a partnership. Better performing partnerships are more likely to raise follow-on funds and larger funds. This relationship is concave so that top performing partnerships grow proportionally less than average performing partnerships. At the industry level, market entry and fund performance is cyclical; however, established funds are less sensitive to cycles than new entrants. Several of these results differ markedly from those for mutual funds.

Management for helpful comments. We also thank Nick Kennedy, Stephen Wilson, Laura Dutson, Matthew Healey, Meng Ning, Courtney Stone, and Bennett Surajat for excellent research assistance. We are grateful to BoardEx and Linda Cechova for providing firm board data, Morningstar and Annette Larson for providing mutual fund data, and to the Chicago GSB Initiative on Global Markets for financial support. This paper uses social networks to identify information transfer in security markets. We focus on connections between mutual fund managers and corporate board members via shared education networks. We find that portfolio managers place larger bets on firms they are connected to through their network, and perform significantly better on these holdings relative to their non-connected holdings. A replicating portfolio of connected stocks outperforms a replicating portfolio of non-connected stocks by up to 7.8 % per year. Returns are concentrated around corporate news announcements, consistent with mutual fund managers gaining an informational advantage through the education networks. Our results

Abstract: A mutual-fund manager is more likely to hold (or buy, or sell) a particular stock in any quarter if other managers in the same city are holding (or buying, or selling) that same stock. This pattern shows up even when controlling for the distance between the fund manager and the stock in question, so it is distinct from a local-preference effect. It is also robust to a variety of controls for investment styles. These results can be interpreted in terms of an epidemic model in which investors spread information about stocks to one another by word of mouth.

and SGF 2006 for their helpful comments. The first and second authors acknowledge

and especially an anonymous referee for useful comments. All errors are ours.

We examine whether mutual funds change their names to take advantage of current hot investment styles, and what effects these name changes have on inflows to the funds, and to the funds ’ subsequent returns. We find that the year after a fund changes its name to reflect a current hot style, the fund experiences an average cumulative abnormal flow of 28%, with no improvement in performance. The increase in flows is similar across funds whose holdings match the style implied by their new name and those whose holdings do not, suggesting that investors are irrationally influenced by cosmetic effects. MUTUAL FUNDS OFFER A UNIQUE OPPORTUNITY to study the behavior of individual investors via the examination of mutual fund flow data. This is important, since investors ’ asset allocation decisions across mutual funds may ultimately affect asset returns. For example, Goetzmann, Massa, and Rouwenhorst (2002) document that factors extracted from the covariance matrix of mutual fund flows provide incremental information beyond broad-based asset class returns

Can mutual fund managers pick stocks? Evidence from their trades prior to earnings announcements∗

We examine the informational effects of M&As investigating how bank mergers affect the pricing of loan contracts. Our test is based on the principle that informational improvements should lead to a closer correspondence between the risk of each firm and its loan rate. We find evidence of these informational effects. Furthermore, our evidence indicates that these improvements derive from improvements in information processing resulting from the merger, rather than from explicit information sharing among the parties in a merger.

In the last three years, Google has conducted the largest corporate experiment with prediction markets we are aware of. In this paper, we illustrate how markets can be used to study how an organization processes information. We document a number of biases in Google’s markets, most notably an optimistic bias. Newly hired employees are on the optimistic side of these markets, and optimistic biases are significantly more pronounced on days when Google stock is appreciating. We find correlated trading among employees who sit within a few feet of one another and employees with social or work relationships. The results are interesting in light of recent research on the role of optimism in entrepreneurial firms, as well as recent work on the importance of geographic and social proximity in explaining information flows in firms and markets. 1