Fund social network and MD&A disclosure quality

Abstract

We investigate the effects of fund social networks on idiosyncratic information in Management's Discussion and Analysis (MD&A). By creating a fund social network between active mutual fund managers, we find the network improves MD&A disclosure quality. The finding is robust after a series of tests, including variable reconstruction, sample change, and endogeneity checks with matching methods, instrumental variables, and the difference-in-differences method. Our additional research indicates that information transparency and sharing among fund managers are key channels for this effect. Moreover, fund social networks play a more effective governance role in a poor company's internal and external environments. Both alumni and colleague networks improve MD&A idiosyncratic information. We empirically demonstrate that institutional investors' social networks, beyond shareholding connections, are critical for corporate governance and improving MD&A idiosyncratic information. Practically, our findings suggest that fund social networks can improve MD&A disclosure quality by conducting joint on-site visits. Their causality suggests that regulators should raise standards for corporate MD&A textual information disclosure and fund managers' information. Moreover, our findings offer individual investors an additional approach to recognizing company disclosure quality and understanding institutional investor behavior, resulting in more informed investment decisions and increased market efficiency.