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  • Return on Relationships

    Where did this come from? You just finished reading your corporate finance and investment finance books meekly trying to memorize all the ratios that Scott and Heitor described - so where did you miss this ratio?

    Well, isn’t it refreshing to see a Return on something other than on Equity, or on Assets or on Sales. You don't need a calculator but this ratio is equally important.

    Welcome to my blog. I am nervously excited to write my first blog but then who isn’t. I certainly hope you enjoy reading it.

    Studying for an MBA while working full time and raising a family is not easy but its worth it. Corporate Finance and Investment Finance were both difficult but really interesting subjects. Both our professors - Scott and Heitor were awesome. NPV is a difficult concept to comprehend. In the middle of it all, I realized there is more to it than just the numbers on the balance sheet or the income or the cash flow statement.

    How about Return on Relationships ?

    Scott talked about this in his Investment Finance class and it did stir up an intrigue amongst many. He shared the results from research of Cohen, Frazzini, Malloy (2008) who analyzed returns from a hypothetical mutual fund composed of certain picks made by the mutual fund managers where the picks were of companies where the mutual fund manager had an educational connection with the CEO of that company. OK. Got it ? No ? Re-read it slowly again and I promise - no more long sentences.

    In other words you identify a fund manager who picks a stock of a company whose CEO went to the same school as he/she did. Repeat that for several fund managers to make up your own hypothetical fund of all these picks and see what return you get. Hmm.. very interesting.

    What were the results? Well if the mutual fund manager and his/her buddy CEO went to the same school during the same time and studied for the same degree- the returns on that selective mutual fund was higher by any average of 7.8% when compared to the mutual fund composed of picks where there was no such connection. Whoa!

    So next time we meet- let’s just be a little more extra nice to each other. You never know who's knocking at your door in a few years with a proposition.

    At crossroads we shall meet again.
    What we know, we will share- for each other’s gain !!
    Sow the seeds of friendship while we are sane.
    Easy to start, takes effort to maintain.

    _________________________
    Gurpreet Gambhir
    EMBA Class of 2014

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