Why do markets need social ties?

31 Pages Posted: 6 Apr 2022 Last revised: 29 Aug 2022

Date Written: March 25, 2022

Previous studies suggest that individuals sharing similar characteristics establish stronger social relationships. This motivates us to examine what combinations of socioeconomic investor attributes are more likely to be associated with joint trading behavior. We use a unique data set on actual social ties between investors and find that similarities in investors' age, geographical location, or length of the co-employment can affect trade synchronization under certain circumstances. Our findings have implications for the literature on the identification of private information pathways in the stock market.

Keywords: Investor network, social network, insider network, information channels, information transfer, private information, network inference

JEL Classification: D8, G11, G40, G41

Suggested Citation

61 Pages Posted: 14 Dec 2020 Last revised: 9 May 2022

Date Written: October 25, 2021

We identify the crucial role social networks play in crowdfunding markets. Investors are 50% more likely to fund projects that their social network peers support and are 11.2% more likely to fund projects from regions to which they have strong social ties, given a one standard deviation change in the variables. Peer effects complement platform design choices and the effect of social ties, and social ties transmit information about economic conditions in project locations. Further, the investor–level effects aggregate and affect project funding successes. Our findings suggest that social networks increase investor awareness, disseminate information, and have real impacts on capital allocations.

Keywords: social network, peer effects, social learning, fintech, crowdfunding, platform design

JEL Classification: D83, G2, G23, L26

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