It’s a Small World : The Importance of Social Connections with Auditors to Mutual Fund Managers’ Portfolio Decisions

Research output: Conference Papers (RGC: 31A, 31B, 32, 33)32_Refereed conference paper (no ISBN/ISSN)peer-review

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Author(s)

Related Research Unit(s)

Detail(s)

Original languageEnglish
Publication statusPublished - Oct 2020

Conference

Title2020 Financial Management Association Annual Meeting (2020 FMA
Virtual Conference)
LocationVirtual
PlaceUnited States
CityNew York
Period19 - 23 October 2020

Abstract

We find that mutual funds whose managers are socially connected with firm auditors hold more shares of these firms and generate superior portfolio returns. Cross-sectional results include that the relation between social connections and mutual fund stockholdings is more pronounced: when the social connections are stronger; when the auditor is in a better position or has stronger incentives to acquire private information; when the fund manager exercises more power; for small audit firms; for auditors in areas with poor investor protection; and for public firms with greater business opacity or private information. Other results are consistent with fund managers electing to schedule their corporate site visits to coincide with the fieldwork of their connected auditors, as would be expected if fund managers time their visits to meet with these auditors to facilitate information transfer. Additionally, we observe associations between fund trading prior to earnings surprises and audit opinions, and the presence of social connections between fund managers and firm auditors. Finally, we show that mutual funds and firms in which they invest tend to appoint connected auditors and pay them higher fees. Collectively, we document empirical patterns that would arise if socially connected auditors and mutual fund managers share information.

Research Area(s)

  • Social connections, Auditor incentives, Mutual fund stockholding

Bibliographic Note

Information for this record is supplemented by the author(s) concerned.

Citation Format(s)

It’s a Small World : The Importance of Social Connections with Auditors to Mutual Fund Managers’ Portfolio Decisions. / Chen, Yangyang; Huang, Jun; Li, Ting; Pittman, Jeffrey.

2020. Paper presented at 2020 Financial Management Association Annual Meeting (2020 FMA
Virtual Conference), New York, United States.

Research output: Conference Papers (RGC: 31A, 31B, 32, 33)32_Refereed conference paper (no ISBN/ISSN)peer-review