The Role of Employees as Information Intermediaries: Evidence from Their Professional Connections

Abstract

This paper investigates whether employees in conjunction with their professional networks function as information intermediaries. Collectively, employees have access to value-relevant information that can be distributed through both their direct professional contacts and the contacts of their contacts. We find that firms with more highly connected employees have more efficient prices with respect to earnings-related information. More highly connected firms have lower abnormal returns and trading volume reactions by retail investors around earnings announcements. These results hold for both executive and non-executive employees. In addition, stock prices incorporate earnings-related information on a more-timely basis over the quarterly earnings cycle when employees are more connected. Finally, we find that retail order imbalances predict the cross-section of future stock returns for firms with highly connected employees. Overall, our findings suggest that employees and their professional connections play an important role as information intermediaries, thereby increasing the information efficiency of stock prices.