Information Flows Within Financial Conglomerates And The Investment Performance Of Mutual Funds

Since the1990s, the financial industry in the United States has seen a wave ofmergers and acquisitions. Many commercial banks acquired investment banks,brokerage houses, and assets management ifrms and formed ifnancial conglomerates.The formation of conglomerates creatcd more opportunities for information sharingbetween lending and security dealing divisions within ifnancial conglomerates. Inrecent years, numerous scandals on Wall Street have highlighted the conlfict ofinterests that arises due to rampant sharing of information between different divisionsof ifnancial conglomerates. While such information sharing could be consideredoptimal from the perspective of the conglomerate，it seriously undermines theinterests of common investors.Compared to the USA with strict securities regulation and perfect legal system，the market system in China is not complete. The protection environment for investorsis poor, and securities regulation is relatively weak. Although ifnancial conglomeratescandals in China has not become a prominent issue，whether this phenomenon alsoexists in China, or is even more rampant with the ifnancial conglomerateorganizational structure becoming increasingly complex and with More diversebusinesses? Therefore, the study of inside information about China’s ifnancialconglomerates is forward-looking.Wc study the information Hows and the economic consequences withinifnancial conglomerates by analyzing how the lending deals of afifliated lendingbanks within the same financial group affect the portfolio allocation and portfolioperformance of the afifliated funds. Wc show that afifliated funds(furid families)controlled by one share-holder increase their stock holdings in firms borrowing fromthese banks around the initiation of the deal more signiifcantly than their controlfunds(fund families). The borrowing stocks in which the afifliated funds increase iheirholdings out-perform the other nonborrovving stocks located in the same industrybeing held by these funds at the same time. These ifndings suggest that the existenceof the loan by itself is not a sufficient signal about the qualily of the borrowing ifrmand it is only the access to an afifliated lending bank that provides the afifliated fundswith the nccessary access to perfect information. Therefore, this portfolio reallocationchoice of the afifliated funds and the abnormal portfolio return is dirven by insideinformation. But this is not the same as the aiffliated funds controlled by more share-holders. This implies that dispersed ownership structure may be an effectivefirewall that limits the lfow of this information between affiliated funds and thelending banks belong to the same ifnancial group. Furthermore, Our evidence pointsto information lfows within conglomerates through informal channels such aspersonal acquaintances.