In a research paper titled “The Price of Street Friends: Social Networks, Informed Trading and Shareholder Costs,” a group including Drexel researchers found that social ties significantly increase a firm’s trading costs.

The paper, written by Jie Cai, LeBow College of Business professor of finance, and Ralph Walkling, Stratakis Chair in Corporate Governance and Accountability and executive director of LeBow’s Center for Corporate Governance, was recently awarded the Outstanding Paper recognition in the investments category for the 2011 Southern Finance Association Annual Meeting. Ke Yang of Lehigh University also co-authored the paper.

Examining more than 18,000 firm year observations, the group studied whether the social ties between a public firm and the professional investment community impact the cost of trading.

“Our evidence illustrates the importance of social ties in the transfer of privileged information and the significant consequences for shareholders,” the paper states.

Executives and directors of a firm, the paper explained, have social connections with Wall Street executives through activities including education, employment or leisure.

Information flows through these channels—sometimes through non-verbal social cues—ultimately influencing a firm’s trading cost.

The findings published in the paper indicate that one executive or director connected to Wall Street increases a firm’s annual trading cost by as much as $1.3 million. With as many as eight connected directors and executives throughout the typical life of a firm, shareholder wealth could be reduced by as much as $213 million.

“Our evidence illustrates the importance of social ties in the transfer of privileged information and the significant consequences for shareholders.”

-excerpt from The Price of Street Friends: Social Networks, Informed Trading and Shareholder Costs

“When Wall Street connections die, trading costs are reduced,” the paper states.

Walkling says the study of social ties in finance is relatively new.

“This research offers new insights into previously unexplored areas related to informed trading,” he says. “One particularly interesting aspect of the social ties idea is the way information can be transferred even inadvertently through non-verbal cues. For example, we could observe the purchase of an expensive car, the cancellation of a shared vacation or the repeated absence at a social event.”