Thy Neighbor?s Portfolio: Word-of-Mouth Effects in the Holdings And Trades of Money Managers
A mutual-fund manager is more likely to hold a particular stock in any quarter if other managers in the same city are holding that same stock. This pattern shows up even when controlling for the distance between the fund manager and the stock in question, so it is distinct from a local-preference effect. These results can be interpreted in terms of an epidemic model in which investors spread information about stocks to one another by word of mouth. In this paper, one explores the hypothesis that investors spread information and ideas about stocks to one another directly, through word-of-mouth communication. This hypothesis comes up frequently in informal accounts of the behavior of the stock market. The remainder of the paper is organized as follows. It describes data, as well as the econometric methodology used and presents main results. Besides this, it reviews some alternative interpretations of these results, and discusses efforts to discriminate among them.