Broker network connectivity and the cross-section of expected returns

Abstract We examine the systematic impact of broker network connectivity on future returns in an order-driven market. For all stocks traded in Borsa Istanbul between March 2005 and November 2015, we estimate network density, reciprocity, and average weighted clustering coefficients as proxies for the broker network connectivity. Our results indicate a negative and significant predictive relationship between connectivity and one-month ahead returns. Stocks in the lowest connectivity quintile earn 1.2% - 1.8% monthly return premiums. We further identify an economic mechanism as to why investors demand a premium for holding stocks with sparse broker networks through intraday panel regressions. Our results suggest that broker connectivity is associated with lower adverse selection risks, even for order-driven markets where intermediaries are assumed to be passive agents.