Sharing some thoughts on a CEO’s performance over coffee. Getting a heads up about an imminent new deal while at a round of golf. Breaking down an earnings report as you wait in line during lunch. For the longest time, such in-person interactions have been the preferred way to exchange information in the business world, especially when it comes to making investment decisions.

But thanks to advanced communication technologies, that seems to be changing. As more people turn to virtual meetings, what role and value do informal in-person interactions still have to play in the transfer of information? That was the question INSEAD Professor of Finance and The Rothschild Chaired Professor of Banking Massimo Massa sought to answer. Together with Jennie Bai from Georgetown University, his paper was recently published in the Journal of Financial Intermediation.

Why it matters

Can an informal encounter give fund managers an advantage when making investment decisions, or is a scheduled Zoom call just as effective? Understanding the value of in-person meetings can help finance professionals make better decisions about the types of interactions they need to help their firms make better investment choices.

Although the research looked at a specific area of the investment sector, the findings could have wider applications. This is especially true at a time when travel budgets are being slashed, hybrid work arrangements are the norm across some industries, and virtual meetings are increasingly seen as an effective substitute for face-to-face get togethers.

The study

Treating the Covid-19 pandemic lockdowns – when physical interactions were highly restricted – as a quasi-natural experiment, the researchers studied actively managed United States-based equity mutual funds between January 2019 and June 2020. Specifically, they examined how proximity-investing funds (PIFs) performed in comparison to distant-investing funds (DIFs) when lockdowns cut off opportunities for face-to-face information gathering.

The underlying logic is that PIFs – which invest in geographically close companies – are more likely to rely on informal information based on human interactions, while DIFs – which invest in more physically distant companies – depend on codified, data-driven sources that are less constrained by geography. Because PIFs rely on physical interactions for their informational edge, their performance may suffer when in-person meetings are restricted.

The takeaway

The researchers found that when in-person contact was curbed, PIFs experienced a sharp decline in performance. In fact, their performance was 0.68% worse than DIFs during the study period. The evidence suggests that due to Covid-19 lockdowns, PIFs lost their ability to source information at more informal gatherings, such as chance encounters at the coffee shop, golf club or gym.

They therefore could not exploit intra-quarter, unobserved actions through active, opportunistic short-term trading and timing, which would normally give them an advantage over more distant funds. Instead, PIFs were forced into defensive, precautionary strategies, including lowering their portfolio concentration and diversifying into more geographically distant stocks where they lacked an informational edge.

The findings show that human contact in informal, social venues is irreplaceable when it comes to maintaining financial market efficiency, as the “soft” information obtained through these channels remains highly valuable. It follows that organisations shouldn’t discount the value of face-to-face interactions for gathering important business insights, regardless of how sophisticated electronic alternatives become.