Brokers’ financial network and stock return

• We propose a methodology to model the interconnectedness among brokerage firms.
• This study mainly investigates the relationship between financial network of brokerage firms and stock returns.
• The empirical analysis is conducted using a unique data set from Taiwan.
• The centralities of brokerage firms are significantly correlated with stock returns.

Brokerage firms are usually not only known for trading stocks for their retail clients in return for commission fee but also known for being information distributors of their clients’ investment recommenders. However, only a few studies have examined investors’ trading behaviors within a brokerage firm. This study proposes a financial network model in modeling the information diffusion process of investors within brokerage firms and investigates the potential effect of interconnectedness among brokerage firms on stock returns. We find that the centrality of brokerage firms has strong explanatory power to stock returns even if we control for the Fama–French pricing factors and other characteristics of stock.