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Thy Neighbor's Portfolio: Word-of-Mouth Effects in the Holdings and Trades of Money Managers

Authors

  • HARRISON HONG,

  • JEFFREY D. KUBIK,

  • JEREMY C. STEIN

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    • Hong is from Princeton University, Kubik is from Syracuse University, and Stein is from both Harvard University and the National Bureau of Economic Research. Thanks to the National Science Foundation for research support, and to Rebecca Brunson and Ravi Pillai for research assistance. We are also grateful for comments and suggestions from Julian Abdey, Malcolm Baker, Gene D'Avolio, Chip Fortson, Rick Green, Rafael LaPorta, Karl Lins, Burton Malkiel, Anna Scherbina, Andrei Shleifer, Jeff Wurgler, and the referee, as well as from seminar participants at Harvard Business School, Boston College, the University of Texas, New York University, Columbia, Northwestern, Maryland, the University of Southern California, Penn State, Syracuse, and the Western Finance Association meetings.

ABSTRACT

A mutual fund manager is more likely to buy (or sell) a particular stock in any quarter if other managers in the same city are buying (or selling) that same stock. This pattern shows up even when the fund manager and the stock in question are located far apart, so it is distinct from anything having to do with local preference. The evidence can be interpreted in terms of an epidemic model in which investors spread information about stocks to one another by word of mouth.

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