Archive for June 13th, 2008

How alumni helps one get better stock returns

June 13, 2008

I came across this interviewwhich basically discusses a paper by 2 Harvard Professors (Laura Cohen and Chris Malloy) . The paper says:

As the researchers found, social networks in the form of school ties—bonds formed based on attendance at a common educational institution—helped equity analysts outperform on stock recommendations when the analysts enjoyed an educational link with a company’s public management. 

A simple portfolio strategy of going long the buy recommendations with school ties and going short buy recommendations without ties earns returns of 5.40% per year.

The paper is here. The authors say:

Taken together, our findings suggest that agents in financial markets can gain informational advantages through their social networks…… The magnitude of our results indicates that informal information networks are an important, yet under-emphasized channel through which private information gets revealed into prices. Identifying the types of information transferred across social networks and the extent to which social networks are important in other information environments can provide us with a richer understanding of information flow, and price evolution, in security markets.

So, this is another advantage of getting through Ivy-leagues. You have access to more information and can btter understand the managerial capabilities of companies which have their alumni members. I am actually not surprised as it is amazing to see the alumni helping people of their colleges in numerous ways.

Though, The interview also mentions similar findings from non-ivy league schools:

Although popular wisdom might suggest that Ivy League ties would come out strong, in fact ties from non–Ivy League schools were just as powerful, the researchers learned.

But I expect these kinds of analysts to be very limited. The non-ivy leagues don’t have the kind of alumni Ivy-leagues have and best jobs are usually limited to those with the connection. I am wondering what would the results of a similar study would be in an Indian setting. The Indian Ivys can then advertise this along with their placement records.

PS.

The authors have done another study on mutual fund managers and school connections. The findings are pretty similar.

 We focus on connections between mutual fund managers and corporate board members via shared education networks. We find that portfolio managers place larger bets on firms they are connected to through their network, and perform significantly better on these holdings relative to their non-connected holdings. A replicating portfolio of connected stocks outperforms a replicating portfolio of non-connected stocks by up to 8.4% per year.

Assorted Links

June 13, 2008

1. MR points to  a treat – Becker, Spence, Phelps, and Scholes discussing the crisis

2. WSJ Blog points ECB blmaes bio-fuels for food price rises

3. Mankiw points to Ricardian equivalence

4. Rodrik points The Economist evaluates radomised evaluations

5. FC Blog points to finance sayings. That one is my favorite as well

6. IDB has a superb post on payday lending and social networks

7. ISB points high steel prices threatening railway projects 

8. TTR on bank consolidation in India


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