Interconnected network of investors influencing the stock market.

Are Your Investments Really Diverse? How 'Cliques' Could Be Secretly Shaping Your Portfolio's Performance

Soraya Malik in Business & Economy August 2025 • 4 min read.

"Uncover the hidden influence of investor networks and how these 'cliques' can impact your portfolio's diversity and returns. Learn to identify and navigate these hidden forces in the stock market."

In the complex world of finance, it's easy to assume that investment decisions are made in isolation, driven purely by data and individual analysis. However, a growing body of research suggests that this isn't always the case. Like-minded investors often form informal networks, or "cliques," that can significantly influence market behavior and the performance of individual stocks. Understanding these hidden networks is essential for anyone looking to make informed investment decisions.

A groundbreaking study by Alan D. Crane, Andrew Koch, and Sébastien Michenaud sheds light on the impact of these investor cliques on corporate governance and firm value. The researchers delve into the intricate web of institutional ownership, revealing how coordinated actions within these groups can shape everything from shareholder voting to a company's long-term strategy. This article will break down their findings, offering actionable insights for both novice and experienced investors.

Prepare to uncover the hidden forces shaping your portfolio and learn how to navigate the complex landscape of investor influence. By understanding the dynamics of investor cliques, you can make more informed decisions, diversify your investments effectively, and potentially unlock new avenues for growth.

What Are Investor Cliques and Why Do They Matter?

Interconnected network of investors influencing the stock market.

Investor cliques are informal networks of institutional investors – think mutual funds, pension funds, and hedge funds – who hold significant stakes in the same companies and actively coordinate their actions. This coordination can take various forms, from voting together on shareholder proposals to collectively influencing a company's strategic direction. While these cliques aren't operating in the shadows, their influence is often subtle and difficult for individual investors to detect.

The power of investor cliques stems from their ability to overcome the "free rider problem" that often plagues individual shareholders. When many small investors own a company's stock, no single investor has a strong incentive to actively monitor management or push for changes. However, when a clique of large institutional investors coordinates their efforts, they can exert significant pressure and hold management accountable.

Increased Governance: Cliques can strengthen corporate governance by holding management accountable and advocating for shareholder interests.
Weakened Threat of Exit: Coordinated ownership can reduce the effectiveness of the "threat of exit," where investors sell their shares to signal dissatisfaction with a company's performance.
Impact on Liquidity: High clique ownership can make a stock less sensitive to liquidity shocks, potentially affecting its price volatility.

Crane, Koch, and Michenaud's research confirms that these coordinated groups can indeed exert considerable influence. Their findings show that clique members are more likely to vote together on proxy items, particularly against management proposals deemed to be of low quality. This suggests that cliques play a crucial role in ensuring that companies are run in the best interests of their shareholders.

Key Takeaways for the Savvy Investor

The world of finance is far more interconnected than it may seem. By understanding the hidden influence of investor cliques, you can gain a more realistic view of your portfolio's true diversification and risk profile. Actively monitor your investments, research the ownership structure of the companies you invest in, and consider the potential impact of coordinated actions by large institutional investors. With this knowledge, you can make more informed decisions and potentially achieve better long-term results.

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Everything You Need To Know

What exactly are 'investor cliques,' and why should individual investors be concerned about their existence?

Investor cliques are informal networks composed of institutional investors, such as mutual funds, pension funds, and hedge funds, who hold substantial stakes in the same companies and coordinate their actions. Individual investors should be concerned because these cliques can exert significant influence on market behavior, corporate governance, and the performance of individual stocks. Their coordinated actions can impact shareholder voting and a company's strategic direction, potentially affecting the value and risk profile of your investments. Recognizing their influence is crucial for understanding the true dynamics of your portfolio.

How do investor cliques influence corporate governance, and what are the implications for shareholders?

Investor cliques can significantly influence corporate governance by collectively holding management accountable and advocating for shareholder interests. Research indicates that members of these cliques are more likely to vote together on proxy items, especially against management proposals considered to be of low quality. This coordinated effort can ensure that companies are run in the best interests of their shareholders by reducing the 'free rider problem,' where individual shareholders lack the incentive to actively monitor management. The implications for shareholders are potentially increased firm value and improved corporate practices due to the heightened oversight.

Can high 'clique ownership' affect a stock's sensitivity to market fluctuations, and if so, how?

Yes, high clique ownership can indeed affect a stock's sensitivity to market fluctuations. Specifically, it can make a stock less sensitive to liquidity shocks. This is because the coordinated ownership by investor cliques reduces the impact of individual investors selling their shares due to dissatisfaction with a company's performance (the 'threat of exit'). The implication is that stocks with high clique ownership may exhibit less price volatility compared to those with more dispersed ownership, potentially providing a degree of stability during market downturns.

What strategies can investors use to identify potential 'clique' influence in their portfolios?

To identify potential clique influence, investors should actively monitor their investments and research the ownership structure of the companies they invest in. This involves looking at the top institutional holders of a stock and identifying any overlapping ownership among them. Investors should also be attentive to shareholder voting records and any signs of coordinated actions among these institutional investors. By understanding the potential impact of coordinated actions by large institutional investors, investors can gain a more realistic view of their portfolio's true diversification and risk profile.

What does the Crane, Koch, and Michenaud study reveal about the impact of investor cliques on corporate governance and firm value, and why is this significant?

The Crane, Koch, and Michenaud study demonstrates that investor cliques exert considerable influence on corporate governance and firm value. Their research confirms that clique members are more likely to vote together on proxy items, particularly against management proposals deemed to be of low quality. This is significant because it suggests that cliques play a crucial role in ensuring that companies are run in the best interests of their shareholders, leading to improved corporate practices and potentially increased firm value. The study highlights the importance of understanding these hidden networks for making informed investment decisions.