What Samsung’s Folding Phone Says About Markets

How Samsung's Recent Stock Performance Demonstrates 'Efficient Markets'

Apr 29, 2019
Finance

SMITH BRAIN TRUST  It should have been a banner week for Samsung Electronics, but wasn’t. The company had distributed its new Galaxy Fold phones to tech reviewers and were anticipating positive reports just a week ahead of the planned April 26 U.S. launch of the device.

But some of the test models of the new $1,980 foldable phones suffered defects after just days of use, casting doubts over what was heralded as the industry’s first mainstream foldable-screen device and Samsung’s comeback phone.

Samsung’s shares slid 3.1% on the day, as images of the damaged screens began to circulate, more than twice the drop for South Korea’s benchmark Kopsi Index, demonstrating the “efficient market” described in Maryland Smith’s Russ Wermers’ recent research.

Active investment management helps to make such public securities markets more efficient, according to a new paper by Wermers on the relationship between active investment management and the efficiency of the public securities markets, including stocks, in the United States.

Product problems are a worry for any tech company, but a particular pain point for Samsung, which in 2016 was forced to pull its Galaxy Note 7 devices from the market after several overheated and caught fire. Unlike index funds, active managers can react by underweighting (selling) a stock with such bad news or, conversely, by overweighting (buying) a stock with good news.

"All investors, both active and passive – as well as the real economy – benefit from the efforts and cost expenditures of active managers through their impact on increasing the efficiency of securities markets,” says Wermers, professor of finance and director of the Center for Financial Policy at the University of Maryland's Robert H. Smith School of Business. “In this light, the average ‘alpha’ provided by active managers (meaning the excess return above the relevant benchmark index), even gross of management fees, does not adequately capture the value of the active management industry to capital markets.”

Wermers’ research, Active Investing and the Efficiency of Security Markets, finds that active managers counteract many of the biases of other investors and help to eliminate market anomalies that are created by them. Active managers also help to provide liquidity to passive managers. Perhaps most importantly, the improved efficiency of security markets afforded by active management especially benefits the capital-raising abilities of small- and middle-sized U.S. firms, since their securities tend to trade less frequently and are more susceptible to being mispriced by the market. Finally, Wermers’ research shows that active managers are a conduit for the incorporation of news into prices benefitting the entire marketplace.

Wermers’ research was supported by the Investment Adviser Association’s Active Managers Council, a trade group that represents SEC-registered investment management firms.

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About the Expert(s)

WermersRuss

Russ Wermers is Professor of Finance at the Smith School of Business, University of Maryland at College Park, where he won a campus-wide teaching award during 2005 and a Krowe Teaching Award (within the Smith Business School) during 2013. His main research interests include studies of the efficiency of securities markets, as well as the role of institutional investors in setting stock prices. In addition, he studies and teaches quantitative equity strategies, and is currently researching microfinance institutions in Thailand. Most notably, his past research has developed new approaches to measuring and attributing the performance of mutual funds, pension funds, and hedge funds, as well as devising winning strategies for investing in these funds.

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