At Harbert: Research
Albert Wang Associate Professor J. Stanley Mackin Distinguished Professor Department of Finance
A Fare Return Tracking Taxis Can Point To Stock Trends W hat do taxi rides have to do with successful portfolio managers? A lot, it turns out. The curious discovery came about when a post-doctoral student stumbled upon a trove of transportation data — specifically, records about New York City taxi rides. At a loss for what to do with the seemingly useless information, the student approached Albert Wang , associate professor and J. Stanley Mackin Distinguished Professor in the Department of Finance at Harbert. Along with department colleague David Cicero, Wang and the post- doc student mined the reams of transportation data and unearthed something unique and timely: key insights into the behavior of successful portfolio managers. Insights that can, in turn, affect the behavior of investors. The trend among investors is to take the passive approach, Wang said. These investors settle for the best the market can offer based on what little knowledge they can find. There’s a general lack of trust in portfolio managers, who demand a percentage of earnings and who, the investors believe, can’t really reap earnings beyond the S&P performance. “Data from the past decade or two shows that active management is not very promising,” Wang said. “The question is, why do we see so many managers, and how come they are not losing their jobs? How come people
are still willing to pay them to manage their money?” He said a small percentage of portfolio managers routinely perform better than the market. They seek critical knowledge and use it to bring in substantial returns for their clients. So how do they get this critical knowledge? To get an answer, Wang and his colleagues studied transportation data, tracking successful portfolio managers as they traveled the streets of New York in taxis. It all had to do with meetings between two market participants: the manager and an insider at a firm. The researchers found that if a taxi trip occurs just before the firm’s earnings announcement, the stocks the trader/ manager buys can actually predict the results of the earnings announcement. When the portfolio manager and the corporate insider had longstanding social connections — school ties, for instance — the meeting was more likely to predict future stock performance. “. . . That taxi trip is not random; [the managers] purposely go out
and find information through their friends, or right before the earnings announcement of the firm,” Wang said. This behavior among managers is not radically unusual, but the means of tracking the behavior is, he believes, a uniquely useful innovation. One obvious benefit of the research is its potential to provide red flags to the SEC on insider trading when the portfolio manager is looking to profit personally. The SEC’s current methods rely largely on emails and phone calls between market participants. An additional, more precise and traceable method could provide another system to alert the commission to such behavior. That knowledge, Wang said, is also reassuring for those caught up in the debate about passive and active investing. Knowing there is someone out there working to obtain information that the average investor does not have could make active investing a more promising choice.
8 Harbert Business, Fall 2022
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