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Old Harvard Ties Failing in New Egalitarian Age

Author: Amity Shlaes, Former Hayek Senior Fellow for Political Economy
July 9, 2008


July 9 (Bloomberg)—They have to get in. Sometimes it’s an Ivy League link they covet. Other times it is that slot at a college that people talk about at church. Either way, college and grad-school applicants clearly believe that a lifelong benefit derives from admission to a certain school.

Recently, a team of economists dubbed this ineffable value a “connection premium.” Most of us assume that a business school connection brings the highest reward of all, especially for that clannish crowd, equity analysts. But how much in hard dollars is that premium actually worth?

Sometimes nothing, according to a paper recently posted by the National Bureau of Economic Research by the authors of the connection premium concept. Lauren Cohen, Chris Malloy and Andrea Frazzini—all of whom happen to be connected to premium schools, Harvard or the University of Chicago—studied movements on analysts’ buy lists, or recommendations. They found that the analysts’ academic ties with executives at companies whose stock they recommended matter not at all when it comes to the returns those stocks earn.

But that’s something new, and the change apparently came out of a single rule, the 2000 Securities and Exchange Commission’s Regulation Fair Disclosure, or Reg FD. Before Reg FD, which bans sharing company information with select people, analysts enjoyed a connection premium, the authors found.

The authors constructed a hypothetical portfolio to compare returns.

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