Yo, HBS Buddy, How’s the Quarter Look?

Interesting new paper out showing how stock picks made money from analysts who attended the same school as the CEO of the firm they were following. Social networks in the stock market were a big subject at Money:Tech, and so I unsurprisingly love this stuff:

We study the impact of social networks on agents’ ability to gather superior information about firms. Exploiting novel data on the educational backgrounds of sell-side equity analysts and senior officers of firms, we test the hypothesis that analysts’ school ties to senior officers impart comparative information advantages in the production of analyst research. We find evidence that analysts outperform on their stock recommendations when they have an educational link to the company. A simple portfolio strategy of going long the buy recommendations with school ties and going short buy recommendations without ties earns returns of 5.40% per year.

Awesome, right? Not so fast Mr. would-be Jim Simons. because there is a huge caveat:

We test whether Regulation FD, targeted at impeding selective disclosure, constrained the use of direct access to senior management. We find a large effect: pre-Reg FD the return premium from school ties was 8.16% per year, while post-Reg FD the return premium is nearly zero and insignificant.

Damn those SEC trouble-makers.


  1. Thanks for posting Paul-
    As one of the participants at M:T and someone that has launched a company, Cake Financial, based on the idea of social networking and investing, I am thrilled to see the continuing body of academic research in this field. Indeed, Lauren and Andrea have been involved with Cake from our inception and they are great thinkers with a fresh look at human behavior and investing.
    For those that are interested, Josh Coval, also of HBS has a great white paper on individual investors and persistence (http://www.people.hbs.edu/jcoval/Papers/persist.pdf). There is also this one on zip codes, where the authors found that investors in the same areas buy the same stocks (http://blog.cakefinancial.com/cake_financial/2007/08/researchers-sho.html)