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The Price of Street Friends: Social Networks, Informed Trading, and Shareholder Costs

Published online by Cambridge University Press:  29 July 2016

Jie Cai ,
Ralph A. Walkling  and
Ke Yang
Jie Cai
Affiliation:
jaycai@drexel.edu, Drexel University, LeBow College of Business, Philadelphia, PA 19104
Ralph A. Walkling*
Affiliation:
rw@drexel.edu, Drexel University, LeBow College of Business, Philadelphia, PA 19104
Ke Yang
Affiliation:
key208@lehigh.edu, Lehigh University, College of Business and Economics, Bethlehem, PA 18015.
*
*Corresponding author: rw@drexel.edu
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Abstract

Recent studies suggest the transfer of privileged information via social ties but do not explicitly examine the cost of these ties to shareholders. We document a significant positive relation between stock transaction costs and a company’s social ties to the investment community. Social ties based on education and leisure activities, stronger ties, and ties to individuals responsible for trading have greater effects. Using investment connection deaths as natural experiments, we document that exogenous severance of ties reduces trading costs and trading activities by connected parties. Our evidence illustrates an important and previously undocumented consequence of social ties.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 3 , June 2016 , pp. 801 - 837
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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