Thy Neighbor?s Portfolio : Word-Of-Mouth Effects In The Holdings And Trades Of Money Managers
This paper 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 stockholdings of any given fund manager respond more sensitively to the holdings of other managers in the same city than to the holdings of fund managers in other cities. A mutual-fund manager is more likely to hold a particular stock in any quarter if other managers in the same city are holding (or buying, or selling) 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. It is also robust to a variety of controls for investment styles. 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.