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

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 are consistent with the notion that the two effects of board-management connections on investor welfare - improved monitoring and increased potential for collusion - balance out in this setting