Post Hiring Performance. After establishing the bias in hiring decisions by consultants to favor connected managers, I test for the performance of these connected managers post-hiring. Connected hires may be beneficial for the plan if they are information driven. If the consultants bias hiring decisions in favor of their connected managers because they have private information about their skills, the connected hires should outperform the unconnected hires. However, if the influence of connections on hiring decisions is due to reciprocity, hiring connected managers may be detrimental to the plan because connected hires may underperform relative to unconnected hires. To compare the performance of connected hires to unconnected hires, I regress post hir- ing four-factor alpha on connection dummies and other independent variables.13 The results are provided in Table 5.14 Model 1 is the base model. Post-hiring performance is positively related to managers’ AUM, suggesting economies of scale. It is also positively related to manager expertise in the mandate asset class, measured by the percentage of manager AUM in the mandate asset class. In Model 2, I add the connection dummy (which includes both direct and indirect connections) to test the impact of connection on post hiring performance. The connection dummy is significantly negatively related to performance, suggesting con- nected hires underperform relative to unconnected hires. In Model 3, I split the connection dummy into two separate dummies for direct and indirect connections. We observe that post-hiring, indirectly connected managers underperform relative to unconnected managers. Indirectly connected hires earn 0.57% lower alpha compared to unconnected hires. However, hiring directly connected managers does not lead to underperformance, possibly because the consultants hired their direct connections only when they were at least as good as the uncon- nected options. They may do so to avoid raising questions of favoring their own managers in case of future underperformance by the connected hires and thus risking their credibility. Consultants’ direct connections can be easily traced and there is also a good chance that the sponsor might be aware of these connections. The underperformance of indirectly connected hires suggest that consultants bias their decisions to favor connected managers to the keep business relationships ongoing. Table 6 provides the results for alternative performance measures - 3 year post hiring cumulativ...
Post Hiring Performance. To ensure that the underperformance for connected hires is not driven by consultant specific attributes, for each connected hiring I consider the unconnected hiring by same con- sultant within a 30-day period and compare the average performance measure for connected hires with unconnected hires. Results presented in table 15 suggest that the connected hirings underperform relative to unconnected hirings by same consultant.
