Board Connections and Bank Trading Returns
Author: Esad Smajlbegovic (Erasmus University Rotterdam), Markus Baltzer (Deutsche Bundesbank) and Erik Fernau (BaFin)
Title: Board Connections and Bank Trading Returns
Abstract: Drawing on security-by-security level data of bank holdings, we study how banks' corporate board connections to non-financial companies relate to their trading activity and returns. Accounting for unobservable time-varying stock and bank characteristics, banks exhibit a five times higher trading activity and generate an abnormal return of 3.35% per year in stocks of connected companies. This informed trading is driven by net sales, stems from information about future firm-specific news, and is not explained by other observable company links. The effect is particularly pronounced among stocks with an uncertain information environment and companies in distress. Results from plausibly exogenous board turnovers in connected companies, which address the matching of bank managers to other firms, corroborate our findings. Overall, evidence suggests that management board networks pose a vital information source for banks' proprietary trading desks.