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Business Networks, Corporate Governance, and Contracting in the Mutual Fund Industry



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    • Kellogg School of Management, Northwestern University. I would like to thank two anonymous referees; Ulrike Malmendier; Jeff Zwiebel; Paul Pfleiderer; Steve Grenadier; Ilya Strebulaev; Denis Gromb; Diane Del Guercio; Jeremy Graveline; and seminar participants at New York University, University of Oregon, Northwestern University, University of British Columbia, Harvard Business School, Wharton, Duke University, Cornell University, University of Washington, University of Texas at Austin, University of Utah, University of California at Los Angeles, Vanderbilt University, University of Michigan, University of Toronto, University of Southern California, Boston College, London Business School, and University of Wisconsin, as well as participants at the 2005 Financial Research Association and the Northern Finance Association meetings for helpful comments and discussion. All remaining errors are mine.


Business connections can mitigate agency conflicts by facilitating efficient information transfers, but can also be channels for inefficient favoritism. I analyze these two effects in the mutual fund industry and find that fund directors and advisory firms that manage the funds hire each other preferentially based on the intensity of their past interactions. I do not find evidence that stronger board-advisor ties correspond to better or worse outcomes for fund shareholders. These results suggest that the two effects of board-management connections on investor welfare—improved monitoring and increased potential for collusion—balance out in this setting.

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