We provide novel evidence suggestive of insider trading through concealed relationships identified using information from over 100,000 Facebook profiles and their 35 million friends. Focusing on connections between fund managers and firm officers, we demonstrate that hidden ties are linked to substantial abnormal returns averaging 135 basis points per month (exceeding 16% alpha annually, t -stat = 3.54) across the universe of mutual funds and public firms. These hidden ties emerge as the most powerful predictor of future stock returns among documented network characteristics, with predictive power increasing over time through the present day. The premium associated with such connections arises not from endogenous selection or familiarity bias; instead, fund managers exhibit specific timing ability in deciding when to hold (or avoid) stocks of firm officers linked through hidden ties. The value of trading information rises with the degree of concealment and is concentrated around earnings and M&A events. The premium is absent in index funds, where strategic stock selection and timing are infeasible. Our findings on the value of hidden ties remain robust across industries, investment styles, time periods, and firm types.

This paper finds evidence of return predictability across economically linked firms. We test the hypothesis that in the presence of investors subject to attention constraints, stock prices do not promptly incorporate news about economically related firms, generating return predictability across assets. Using a data set of firms' principal customers to identify a set of economically related firms, we show that stock prices do not incorporate news involving related firms, generating predictable subsequent price moves. A long–short equity strategy based on this effect yields monthly alphas of over 150 basis points.

We demonstrate that legislation has a simple, yet previously undetected, impact on stock prices. Exploiting the voting record of legislators whose constituents are the affected industries, we show that the votes of these “interested” legislators capture important information seemingly ignored by the market. A long-short portfolio based on these legislators' views earns abnormal returns of over 90 basis points per month following the passage of legislation. Industries that we classify as beneficiaries of legislation experience significantly more positive earnings surprises and positive analyst revisions in the months following passage of the bill, as well as significantly higher future sales and profitability. We show that the more complex the legislation, the more difficulty the market has in assessing the impact of these bills. Further, the more concentrated the legislator's interest in the industry, the more informative are her votes for future returns.

AFA Meetings in Chicago for helpful comments and suggestions. We are grateful for funding from the We demonstrate that a firm’s ability to innovate is predictable, persistent, and relatively simple to compute, and yet the stock market ignores the implications of past successes when valuing future innovation. We show that two firms that invest the exact same in research and development (R&D) can have quite divergent, but predictably divergent, future paths. Our approach is based on the simple premise that while future outcomes associated with R&D investment are uncertain, the past track records of firms may give insight into their potential for future success. We show that a long-short portfolio strategy that takes advantage of the information in past track records earns abnormal returns of roughly 11 percent per year. Importantly, these past track records also predict divergent future real outcomes in patents, patent citations, and new product innovations. Firms engage in a variety of activities. Some of these activities are straightforward, and easy to assess how they will impact firm value (e.g., maintenance capital expenditures). However, some of these activities, while crucially important for the discounted value of a

Exploiting the fact that insiders trade for a variety of reasons, we show that there is predictable, identifiable “routine” insider trading that is not informative about firms’ futures. A portfolio strategy that focuses solely on the remaining “opportunistic” traders yields value‐weighted abnormal returns of 82 basis points per month, while abnormal returns associated with routine traders are essentially zero. The most informed opportunistic traders are local, nonexecutive insiders from geographically concentrated, poorly governed firms. Opportunistic traders are significantly more likely to have SEC enforcement action taken against them, and reduce trading following waves of SEC insider trading enforcement.

We study the impact of social networks on agents’ ability to gather superior information about firms. Exploiting novel data on the educational background of sell‐side analysts and senior corporate officers, we find that analysts outperform by up to 6.60% per year on their stock recommendations when they have an educational link to the company. Pre‐Reg FD, this school‐tie return premium is 9.36% per year, while post‐Reg FD it is nearly zero. In contrast, in an environment that did not change selective disclosure regulation (the U.K.), the school‐tie premium is large and significant over the entire sample period.

This paper employs a new empirical approach for identifying the impact of government spending on the private sector. Our key innovation is to use changes in congressional committee chairmanships as a source of exogenous variation in state-level federal expenditures. We show that fiscal spending shocks appear to significantly dampen corporate investment activity. This retrenchment occurs within large and small states and is most pronounced among geographically concentrated firms. The effects are economically meaningful, and the mechanism--entirely distinct from interest rate and tax channels--suggests new considerations in assessing the impact of government spending on private-sector economic activity.

Management for helpful comments. We also thank Nick Kennedy, Stephen Wilson, Laura Dutson, Matthew Healey, Meng Ning, Courtney Stone, and Bennett Surajat for excellent research assistance. We are grateful to BoardEx and Linda Cechova for providing firm board data, Morningstar and Annette Larson for providing mutual fund data, and to the Chicago GSB Initiative on Global Markets for financial support. This paper uses social networks to identify information transfer in security markets. We focus on connections between mutual fund managers and corporate board members via shared education networks. We find that portfolio managers place larger bets on firms they are connected to through their network, and perform significantly better on these holdings relative to their non-connected holdings. A replicating portfolio of connected stocks outperforms a replicating portfolio of non-connected stocks by up to 7.8 % per year. Returns are concentrated around corporate news announcements, consistent with mutual fund managers gaining an informational advantage through the education networks. Our results

We explore a new mechanism by which investors take correlated shortcuts and present evidence that managers—using sales management—take advantage of these shortcuts. Specifically, we exploit a regulatory provision wherein a firm's primary industry is determined by the highest sales segment. Exploiting this regulation, we provide evidence that investors classify operationally nearly identical firms as starkly different depending on their placement around this sales cutoff. Moreover, managers appear to exploit this by manipulating sales to be just over the cutoff in favorable industries. Further evidence suggests that managers engage in activities to realize large, tangible benefits from this opportunistic action.

Using proprietary data on stock loan fees and quantities from a large institutional investor, we examine the link between the shorting market and stock prices. Employing a unique identification strategy, we isolate shifts in the supply and demand for shorting. We find that shorting demand is an important predictor of future stock returns: An increase in shorting demand leads to negative abnormal returns of 2.98% in the following month. Second, we show that our results are stronger in environments with less public information flow, suggesting that the shorting market is an important mechanism for private information revelation.