2019 - 2021 FMA Magazine

RECOGNIZED RESEARCH
ALBERT
WANG
The acquisition and exploitation of private
information in U.S. capital markets has been an
issue since the early days of Wall Street.
While regulators have increased their efforts to eliminate
selective disclosure, methods mutual fund managers use to
obtain inside information from local firms, however, have
become creative ... and simple. How? They call a taxi.
Harbert College of Business finance professors Dr. David Cicero
and Dr. Albert Wang’s co-authored study, “Taxi! Do Mutual
Funds Pursue and Exploit Information on Local Companies?”
examined data obtained from the New York City Taxi and
Limousine Commission from 2009 to 2016 and identified more
than 500,000 recorded trips between 266 mutual fund offices
and 244 public firm headquarters in Manhattan.
Neither phone nor email records are left behind. Instead,
information can be shared face-to-face – before it goes public
-- and fund managers appear to obtain superior information by
visiting local companies. It was discovered that only those funds
in New York City that frequently visit local companies via taxi
overweight local firms in their respective portfolios, and firm
visits were associated with superior investment performance,
the paper reported.
“These trips are elevated a couple of weeks before earnings
announcements,” Cicero, the Bray Distinguished Associate
Professor in Finance, noted. “Insiders know a lot from the end
of the quarter up until earnings are released that the rest of the
world does not know. What do fund managers do when they get
this information? Well, they appear to trade on it -- profitably.
“This study ties into fundamental questions of financial
economics … are fund managers able to outperform the markets?
Should clients be paying them fees because they are good
at their jobs? Or do they just cheat the system? Even in this
small area where it looks like they have outperformed their
non-local peers, our evidence suggests that the reason they’re
outperforming is they’re obtaining private information. There’s
not much evidence to suggest they earned those fees from
clients because they know how to pick stocks, and that sheds a
bad light on the overall industry.”
Who would have thought to trace taxi rides between mutual
funds and corporate firms in New York City in hopes of
uncovering potential insider trading? A former student in
Harbert College’s Ph.D. program in Finance, Shen Zhang, now
an Assistant Professor in Finance at Troy University and coauthor
on this paper, brought this revelation to the attention of
his mentors at Harbert, and the idea for a new research paper
was born.
“Shen came to us and said, ‘I was able to uncover this interesting
data. I don’t know what to do about it, but it’s pretty cool,”
Wang, the J. Stanley Mackin Distinguished Professor of Finance,
said. “The three of us sat down and we began this research
project. It’s a huge amount of data – millions of taxi records. We
had to run our analysis on the supercomputer managed by the
College of Engineering.”
The researchers hope their paper will not only shed light on
potential insider trading practices but provide regulators
another source to help keep the system fair. “Our paper could
serve as a helpful piece to the Securities Exchange Commission
or the government,” Wang added. “If there’s enough evidence
suggesting managers are doing something they’re not supposed
to do, then that could prompt them to look into taxi records
or investigate more carefully any other means by which fund
managers could gain information from corporate insiders.”
FMA 2019-2021 MAGAZINE 47