Woof! for descriptive statistics

Gary Smith points to this news article in the Economist, “WOOF, CAKE, BOOM: stocks with catchy tickers beat the market,” which reports:

In a study published in 2009 by Gary Smith, Alex Head and Julia Wilson of Pomona College in California, a group of people were asked to pick American public companies with “clever” tickers. The resulting list of 82 shares included MOO for United Stockyards, a livestock company, GEEK for Internet America, a service provider, and SPUD for 1 Potato 2, a restaurant chain.

The authors found that a dollar invested in their portfolio of cleverly named ticker symbols in 1984 would have been worth $104 in 2006, an annual return of 23.5%. The return for all shares in the New York Stock Exchange and Nasdaq, the United States’ two largest exchanges, during this period was a mere 12% per year. Traders, the authors argued, are unwittingly drawn to companies with memorable tickers, which increases the demand for their shares and drives up their value.

Unless I’m missing something, I don’t think that last statement is an accurate description of the paper. I didn’t notice anything in the Smith/Head/Wilson article saying anything about traders doing this unwittingly.

One thing I really like about their paper is that it’s unabashedly descriptive:

– From the abstract:

This paper investigates the performance of stocks with memorable ticker symbols during the years 1984–2005 and finds that, on average, their daily returns are higher than for the overall market.

– From the conclusion:

In recent years, a substantial number of companies have chosen clever ticker symbols. On average, these stocks have outperformed the market by a substantial and statistically persuasive margin. We do not know why these stocks have done so well. Perhaps a clever ticker symbol has been a useful indicator of the managers’ ability—ability that revealed itself over time as the company repeatedly exceeded investors’ expectations. Or perhaps a clever ticker matters because it is memorable and has a subtle, but persistent, influence on investors who buy the stock and on those who are considering a merger or acquisition. . . .

Openly descriptive, and without strong causal claims.

The Economist article continues:

But might the results of the study simply have been a fluke? A decade on, Mr Smith and two new co-authors, Naomi Baer and Erica Barry, have repeated the analysis with 22 of the original 82 companies that were still trading in 2006. (Only 12 of the 82 firms went bust; most ceased trading for other reasons, such as buyouts, mergers, or delisting.)

Once again, the portfolio containing tickers such as CAKE (for Cheesecake Factory, a dessert chain) and WOOF (for VCA Antech, which offers veterinary services) outperformed. This group of companies earned 13.2% per year between 2006 and 2018, compared with an annual return of 4.9% for the broader market. Mr Smith also reviewed the performance of a second portfolio composed of newer firms with clever tickers such as PZZA (Papa John’s Pizza) and WIFI (Boingo Wireless). This group managed an annual return of 11.3%. . . .

It’s good to see people follow up on their research.

Look—I don’t want to make too big a deal of this. It’s just one little study. But we spend enough time having to deal with scientific hype of various sorts, that it’s good to see some clean description and replication.