The Dark Side of Social Networks

There is a blackly intriguing new paper out from Stanford GSB researcher Camelia Kuhnen that uses a novel data data set from the mutual fund industry to look at a dark side of social networks: the effect of such things on compensation, hiring, and performance. The results are worth reading:

Fund boards award portfolio management contracts preferentially to advisory firms which have had more business relationships with the funds’ directors. A one-standard deviation increase in connections between directors and a candidate advisor increases the odds that the candidate is chosen by 16%.

When advisory firms create new funds they offer board seats preferentially to directors known from past business relationships. Increasing connections by one standard deviation corresponds to a 28% increase in the odds of a candidate director being nominated.

Advisors receive higher pay when they are more connected to the fund directors. A one standard deviation increase in connections translates into more than $1 billion increase in transfers from mutual fund investors to advisory firms each year.

The preferential hiring and pay of connected advisors is not compensated by higher performance. A one standard deviation increase in connections corresponds to a decrease in fund returns (before and after advisory fees) and fund alphas
of 1% per year.

Related posts:

1. Social Photo Networks? Pshaw!
2. Screwy Scale-Free Networks
3. PNAS Geek-Out, Part III: Geographic Routing in Social Networks
4. Dark chasm in brokerage settlement
5. Performance Persistence at Venture Funds