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When it comes to investing, it pays to be true to your school, according to a new paper from the National Bureau of Economic Research.
Mutual fund managers had significantly better returns on investments made in companies led by their former classmates than they did in companies where no such connections existed, according to a recent study. Indeed, investments in so-called “connected” stocks outperformed non-connected stocks by more than 8 percent, the study found.
The findings are published in the bureau’s working paper, entitled "The Small World of Investing: Board Communications and Mutual Fund Returns."
Managers had the greatest success when they invested in companies where the senior officials attended the same college or university during the same period as the managers did, and also shared a major. But, even absent such strong ties, managers still did better with companies led by those with a shared alma mater.
The paper outlines several potential reasons that managers do better when they invest in connected companies. If managers are personally acquainted with the leadership of a company, they may be more likely to get a frank assessment of its viability. Managers also may be more inclined to take risks on connected companies.
Lauren Cohen, one of three co-authors of the paper, said the authors couldn’t determine whether any of the higher investment returns were attributable to insider trading -- the illegal sharing of non-public information.
“That’s one of the possible explanations,” he said. “We can’t say that that’s not going on, but we also can’t say definitively that it is what’s going on.”
The study examined the portfolios of 2,501 managers, matching the managers’ educational backgrounds with those of board members and senior officials at 7,660 publicly traded companies. The study found that managers often had shared educational backgrounds with the leaders of the companies where they invested money.
It may not come as a surprise that two Ivy League graduates would do good business together, but the study found that managers saw equally substantial gains in investment returns when they graduated from non-Ivy League institutions and invested in connected companies.
