Volume 15

Volume 15, Number 1, 2014 Abstracts
© Copyright Taylor & Francis, LLC. 2014

Throwing Good Money After Bad? The Impact of the Escalation of Commitment of Mutual Fund Managers on Fund Performance
Yu-En Lin - Wuyi University
Whei-May Fan - China University of Technology
Hsiang-Hsuan Chih - National Dong Hwa University

Numerous prior studies refer to the potential existence of irrational investment behavior among mutual fund managers, such as disposition effect. However, the focus in such studies has been placed on the irrationality of their selling decisions, although similar problems may be inherent in their buying decisions. This study presents evidence that if mutual fund managers do display a tendency to escalate their commitment to losing stocks, there will be negative impacts on the performance of the funds. Managers continue to buy losers not because they judged to choose rationally but rather because of irrational escalation of commitment.

Excessive Volatility is Also a Feature of Individual Level Forecasts
Anjali Nursimulu - Ecole Polytechnique Fédérale de Lausanne
Peter Bossaerts - California Institute of Technology and Swiss Finance Institute

The excessive volatility of prices in financial markets is one of the most pressing puzzles in social science. It has led many to question economic theory, which attributes beneficial effects to markets in the allocation of risks and the aggregation of information. In exploring its causes, we investigated to what extent excessive volatility can be observed at the individual level. Economists claim that securities prices are forecasts of future outcomes. Here, we report on a simple experiment in which participants were rewarded to make the most accurate possible forecast of a canonical financial time series. We discovered excessive volatility in individual-level forecasts, paralleling the finding at the market level. Assuming that participants updated their beliefs based on reinforcement learning, we show that excess volatility emerged because of a combination of three factors. First, we found that submitted forecasts were noisy perturbations of participants’ revealed beliefs. Second, beliefs were updated using a prediction error based on submitted forecast rather than revealed past beliefs. Third, in updating beliefs, participants maladaptively decreased learning speed with prediction risk. Our results reveal formerly undocumented features in individual-level forecasting that may be critical to understand the inherent instability of financial markets and inform regulatory policy.

A Turning Point Method For Measuring Investor Sentiment
Ray R. Sturm - University of Central Florida

Technical analysis has always been a controversial topic with weak evidence in the literature while behavioral finance has enjoyed success. Yet the objective of technical analysis is to measure investors’ behavior, implying the need to reexamine the study of technical methods. This study begins to close the gap in evidence between behavioral finance and technical analysis by developing an objective turning point methodology to infer unobservable investor sentiment. Using Parkinson's [1980] estimate of volatility, the findings indicate that the turning point method not only captures investor sentiment effectively, but more effectively than traditional time-static methods.

The PR Premium
Smadar Siev - University of Haifa

Press releases (PR) are the most common and popular way for a firm to publicize its news. The annual number of PR varies substantially among firms, from just a few to hundreds. This work documents a gap in stock's returns between firms that publish low and high number of PR per annum in favor of the former. This gap was found for both the year of publication and the following one and its magnitude is 7–8% and 5–6%, respectively. This gap remains intact even after controlling for firm characteristics such as beta, market capitalization and more. I call this gap the “PR Premium.”

Security Returns and Tax Aversion Bias: Behavioral Responses to Tax Labels
Kay Blaufus - Leibniz Universität Hannover
Axel Möhlmann - Leibniz Universität Hannover

This article studies behavioral responses to taxes in financial markets. It is motivated by recent puzzling empirical evidence of taxable municipal bond yields significantly exceeding the level expected relative to tax exempt bonds. A behavioral explanation is a tax aversion bias, the phenomenon that people perceive an additional burden associated with tax payments. We conduct market experiments on the trading of differently taxed and labeled securities. The data show an initial overvaluation of tax payments that diminishes when subjects gain experience. The tax deduction of expenses is valued more than an equivalent tax exemption of earnings. We find that the persistence of the tax aversion bias critically depends on the quality of feedback. This suggests that tax aversion predominantly occurs in one-time, unfamiliar financial decisions and to a lesser extent in repetitive choices.

Exploring Ambiguity and Familiarity Effects in The “Earnings Game” Between Managers and Investors
Ning Du - DePaul University
Marjorie K. Shelley - Texas A&M University

Prior evidence suggests that managers and investors play an earnings game in which managers bias their earnings forecasts downward as the earnings announcement date approaches. Knowing managers’ incentives to provide biased guidance, investors still revise their expectations downward helping to create “positive earnings surprises.” Using a 2 (ambiguity) × 2 (familiarity) between subject randomized experimental design where MBA students playing the roles of manager and investor answer a series of questions related to earnings guidance, we investigate whether earnings environment ambiguity and manager-investor familiarity influence behavior during the “earnings game.” In general, results from this study suggest that ambiguity contributes to managers’ propensity to mislead and investors’ propensity to follow, and a false sense of familiarity may amplify investors’ reliance on managers’ guidance.

Volume 15, Number 2, 2014 Abstracts
© Copyright Taylor & Francis, LLC. 2014

Double Bubbles in Assets Markets With Multiple Generations
Cary Deck - Chapman University
David Porter - Chapman University
Vernon Smith - Chapman University

We construct an asset market in a finite horizon overlapping-generations environment. Subjects are tested for comprehension of their fundamental value exchange environment and then reminded during each of 25 periods of the environment's declining new value. We observe price bubbles forming when new generations enter the market with additional liquidity and bursting as old generations exit the market and withdrawing cash. The entry and exit of traders in the market creates an M shaped double bubble price path over the life of the traded asset. This finding is significant in documenting that bubbles can reoccur within one extended trading horizon and, consistent with previous cross-subject comparisons, shows how fluctuations in market liquidity influence price paths. We also find that trading experience leads to price expectations that incorporate fundamental value.

The Effect of Word-of-Mouth Communication on Stock Holdings and Trades: Empirical Evidence From an Emerging Market
Metin Argan - Anadolu University
Guven Sevil - Anadolu University
Abdullah Yalama - Eskisehir Osmangazi Universitesi

The purpose of this study is to investigate the relationship between investors’ satisfaction and intention and word-of-mouth communication. This study contributes to the ongoing debate on the relationship between investor behavior and word-of-mouth communication. Many studies are related to investors’ participation and individual investors’ asset allocation decisions that are instigated by their social community via word-of-mouth communication whereas this study directly investigates the relationship between investment satisfaction and intention and word-of-mouth communication. We emphasize how many factors are considered when making satisfactory investment decisions. Our results confirm the strong relationship between the satisfaction and intention of investors and word-of-mouth communication. This finding may be useful to regulators, investors and managers who seek to establish effective rules for stock holdings and trade.

Decision Utility and Anticipated Discrete Emotions: An Investment Decision Model
Philip Y. K. Cheng - Australian Catholic University

Integrating theories and findings from various disciplines, we develop a decision utility model to explain how anticipated discrete emotions mediate investment decisions. We illustrate the model with the anticipated discrete emotions of a hypothetical Ponzi scheme investor and suggest practical measures to manage financial risks, emotionally.

Mr. Market's Mind: Finance's Hard Problem
Patrick Schotanus - University of Essex

The market as a mind is the implicit premise in any discussion on whether the market is rational or not. Still, its implications, in terms of ontology and epistemology, are hardly understood. In particular, this paper defines the market's version of the mind-body problem and labels it as finance's “hard” problem. Its denial by modern finance causes this dominant paradigm to fail in dealing with reality in general and to produce incomplete investment knowledge in particular. Finally, as part of facing up to this problem, this paper offers a glimpse at a practical approach which may enrich investment research.

Information and Investor Behavior Surrounding Earnings Announcements
C. José García - University of Valencia
Begoña Herrero - University of Valencia
Ana M. Ibáñez - University of Valencia

The goal of this paper is to analyze the impact of annual earnings announcements on the market through the order flow data in addition to the usual transaction data. In this respect, examining order flow data can potentially reveal valuable information that is not available from transaction data. In fact, the data allow us to test hypotheses about asymmetric information and investor behavior and to test if the behavior varies with investor sophistication. In addition, the paper tries to identify the determinants of the impact on a firm's value using assumptions about investor behavior.

Intraday Stock Market Behavior After Shocks: The Importance of Bull and Bear Markets in Spain
Jose Luis Miralles-Marcelo - University of Extremadura
Jose Luis Miralles-Quiros - University of Extremadura
Maria del Mar Miralles-Quiros - University of Extremadura

The stock market behavior after different shocks has been analyzed from different points of view, but none has considered, as in this work, the possibility of combining different procedures, intraday returns over six days, and different phases of the markets in the Spanish stock market. The inconclusive results that we find following the previous empirical methodologies make way to interesting results when bull and bear markets are considered. We find that positive shocks are much more important than negative shocks, especially in downward trends where we find a significant overreaction effect that can be associated with the pessimism prevailing in a bear market after the “dead cat bounce” which represents those positive shocks.

Volume 15, Number 3, 2014 Abstracts
© Copyright Taylor & Francis, LLC. 2014

Managerial Expectations of Synergy and the Performance of Acquiring Firms: The Contribution of Soft Data
James Cicon - New Jersey Institute of Technology
Jonathan Clarke - Georgia Institute of Technology
Stephen P. Ferris - University of Missouri
Narayanan Jayaraman - Georgia Institute of Technology

This study examines whether the “soft” information present in merger and acquisition (M&A) announcement press releases contains incrementally valuable news relative to traditional “hard” data. Using the methodology of Loughran and McDonald [2011], we construct measures of synergy expectations and managerial optimism for more than 1,200 M&A announcements over the period 1995–2007. We find that synergy expectations are positively related to announcement period returns, longer-run performance, and the market's reaction to quarterly earnings announcements. Managerial optimism is insignificant for explaining a merger's subsequent performance. We conclude that the soft information contained in M&A announcements concerning synergy expectations can provide useful information to investors.

Analysts’ Forecast Dispersion and Stock Returns: A Quantile Regression Approach
Ming-Yuan (Leon) Li - National Cheng Kung University
Jyong-Sian Wu - Yuanta Securities Investment Banking Department

Prior research has not provided conclusive evidence on the association between analysts’ forecast dispersion and subsequent stock returns. Since inferences from prior studies may be confounded by research design choices, we use the quantile regression (QR) approach and assess the hidden non-monotonic relations between dispersion and stock returns within a broader sample. The empirical results show that dispersion is negatively associated with subsequent stock returns when the latter is in lower quantiles. In contrast, when the stock returns are in high quantiles, dispersion is positively associated with subsequent stock returns. Moreover, the association between dispersion and stock returns is trivial when the mid-range return quantiles are concerned. These non-uniform connections between dispersion and stock returns reflect the different status of overpricing correction process. Our findings help to reconcile the mixed results reported by prior research concerning the relation between analysts’ forecast dispersion and subsequent stock returns.

A Behavioral Shift in Earnings Response After Regulation FD
Seung Woog Kwag - Sookmyung Women's University

The Regulation Fair Disclosure of 1999 (FD) intends to promote the full and fair disclosure of price information and further prevent insider trading. As a result, the public investors are expected to be empowered with more quality and relevant information. This study examines a behavioral shift in investor reaction to quarterly earnings announcements after the passage of the FD due to the expected improvement in information asymmetry. The empirical findings suggest that investors show a behavioral shift after the FD in response to biased earnings forecasts. Investors become more active in that they place a discount on optimistic earnings forecasts during the earnings announcement period. It is less obvious that they place a premium on pessimistic forecasts. Another coherent finding is that investors attempt to correct for the announcement-period mis-adjustments during the post-announcement period.

Do Newspaper Articles Predict Aggregate Stock Returns?
Manuel Ammann - University of St. Gallen
Roman Frey - University of St. Gallen
Michael Verhofen - University of St. Gallen

We analyze whether newspaper content can predict aggregate future stock returns. Our study is based on articles published in the Handelsblatt, a leading German financial newspaper, from July 1989 to March 2011. We summarize newspaper content in a systematic way by constructing word-count indices for a large number of words. Word-count indices are instantly available and potentially valuable financial indicators. Our main finding is that newspaper articles have provided information valuable for predicting future DAX returns in and out of sample. We find evidence that the predictive power of newspaper content has increased over time, particularly since 2000. Our results suggest that a cluster analysis approach increases the predictive power of newspaper articles substantially.

The Core of Predation: The Predatory Core—Finding the Neurobiological Center of Financial Predators and Preys
Olivier Mesly - University of Québec in Outaouais

This paper proposes a theoretical view of the financial predator and prey's brain, with the hypothalamus being the core cerebral structure driving financial predatory behaviors. This model will hopefully help opening doors to possible better management as it appears that the number of financial scandals that have their source in the malevolent behavior of a selected few keeps rising. Indeed, neuromarketing is an emerging trend but lots of work remains to be done. This paper suggests that future research could be oriented toward the understanding of the predatory core in human behavior, more specifically referred to as the black box of consumers.

A Social-Psychological Perspective on Herding in Stock Markets
Maria Andersson - University of Gothenburg
Martin Hedesström - University of Gothenburg
Tommy Gärling - University of Gothenburg

A social-psychological perspective conceives of herding in stock markets as informative social influence resulting from heuristic or systematic information processing. In three laboratory experiments employing undergraduates we apply this perspective to investigate factors that prevent herd influence that would lead to inaccurate predictions of stock prices. In Experiment 1, we show that an economic reward for making the same predictions as the herd increases the influence of a majority but not the influence of a minority, and that an individual economic reward for making accurate predictions reduces the influence of the majority. In Experiment 2, we show a reduced influence of a majority herd's inaccurate predictions when requiring assessments of the accuracy of the majority herd´s predictions as compared to requiring judgments of their consistency. Experiment 3 shows that a lower volatility of stock prices reduces the influence of a majority herd´s inaccurate predictions.

Individual Characteristics and the Disposition Effect: The Opposing Effects of Confidence and Self-Regard
Kathryn Kadous - Emory University
William B. Tayler - Brigham Young University
Jane M. Thayer - University of Virginia
Donald Young - Georgia Institute of Technology

We conduct two experiments to examine potential causes of the disposition effect. In Experiment 1, we rule out beliefs in mean reversion as a cause of the disposition effect. Although a belief in the mean reversion of stock prices should be independent of whether an investor owns or only follows the stock, we show only investors who own the stock behave as though prices will reverse. In Experiment 2, participants buy and sell securities over multiple periods. We find that self-regard and investing confidence (two types of self-esteem) have opposing influences on investors’ tendency to hold losing investments. Investors with lower self-regard hold losing investments longer than those with higher self-regard, and investors with higher confidence hold losing investments longer than those with lower confidence. We focus on investors’ tendency to hold losing stocks too long because prior research suggests the gain versus loss sides of the disposition effect are driven by different biases.

Psychology, Stock/FX Trading and Option Prices
Alan Beilis - Alan Beilis Consulting
Jan W. Dash - Fordham University
Jacqueline Volkman Wise - Temple University

The financial crisis of 2008 had many putative causes where psychology was an important driver for human decisions. However, quantitative financial models have no “knobs” to dial psychology parameters, and so arguably cannot possibly cope with financial crises. Here we take a first step by considering how a particular aspect of psychology can influence an underlying security and subsequent option prices, in a quantitative model. We investigate how psychological regret and fear impact trading selling behavior and induces changes in underlying security prices. We then consider the resulting changes in option prices with empirical evidence.

Determinants of Inflow to Mutual Funds: Criterion and Methodology for Their Application to the Mainland China Market
Tzu-Yi Yang - Ming Chi University of Technology
Yu-Tai Yang - Army Academic R.O.C.

This study is based on the Froot, O’Connell, and Seasholes [2001] and Hsieh, Yang and Yu [2008] as foundations to study which reasons and control factors cause herding behavior of mutual fund inflows. The study uses the most popular Asian emerging market, China, as the sample to determine the real attractive reason behind the mutual fund inflows to China. The significant determinant of the mutual fund inflows to China is stock returns for both Shanghai and Shenzhen A stock markets.

The Effects of Earnings Guidance on Investors’ Perceptions of Firm Credibility in a Two-Firm Setting
Mario J. Maletta - Northeastern University
Yue Zhang - Northeastern University

This study investigates how a peer firm's earnings guidance affects investors' credibility assessments of a target firm. Results suggest that when both a target firm and a peer firm provide earnings guidance, contrast effects occur such that the more accurate the earnings guidance of the target firm relative to the peer, the greater are investors' credibility assessments for the target. However, such contrast effect diminishes as the target firm's earnings guidance becomes more accurate. On the contrary, when a peer provides earnings guidance but the target firm does not, assimilation effects as opposed to contrast effects dominate investors' credibility judgments.

Reuters Sentiment and Stock Returns
Matthias W. Uhl - UBS AG

Sentiment from more than 3.6 million Reuters news articles is tested in a vector autoregression model framework on its ability to forecast returns of the Dow Jones Industrial Average stock index. We show that Reuters sentiment can explain and predict changes in stock returns better than macroeconomic factors. We further find that negative Reuters sentiment has more predictive power than positive Reuters sentiment. Trading strategies with Reuters sentiment achieve significant outperformance with high success rates as well as high Sharpe ratios.

Do Institutional and Individual Investors Differ in Their Preference for Financial Skewness?
Kimberly F. Luchtenberg - East Carolina University
Michael J. Seiler - The College of William & Mary

Employing a unique sample of individual and institutional investors, we conduct experiments to determine investors’ preference for (or indifference to) financial skewness. We present investors with a series of stocks with varying levels of skewness. Using Instant Response Devices, we then collect investors’ choices to hold or sell each stock. Among stocks with equal expected returns, we find strong evidence that the sample investors use a prospect theory utility function rather than a mean-variance expected utility function to decide to sell or hold stocks. In the loss domain, we find that investors are ambivalent about the choice between positively and negatively skewed stocks. However, in the gain domain, we find that both individual and institutional investors prefer negatively skewed stocks—a contrast from previous research suggesting that individuals (and not institutional investors) prefer positive skewness. We also find evidence suggesting that reference points are important in financial decision making.

The Time Varying Relation Between Consumer Confidence and Equities
Cetin Ciner - University of North Carolina Wilmington

We examine the impact of changes in consumer confidence measures on future stock index returns. Our analysis is built on the growing understanding that investor sentiment is an important factor in the stock market. By using frequency dependent regression methods, we show that there is a time-varying relation between consumer confidence and stock returns. Higher levels of consumer confidence imply greater returns in the short term but negative returns in the medium term. However, this effect is only observed for the small firm index. Moreover, there is evidence to suggest that consumer confidence is significantly affected by stock returns in reverse causality.

Psychological Oil Price Barrier and Firm Returns
Paresh Kumar Narayan - Deakin University
Seema Narayan - RMIT University

In this paper, we investigate the psychological barrier effect induced by the oil price on firm returns when the oil price reaches US$100 or more per barrel. We find evidence of the negative effect of the US$100 oil price barrier for: (a) the entire sample of 1559 firms listed on the American stock exchanges; (b) both foreign and domestic firms, with domestic firms significantly more affected; (c) the 10 different sizes of firms, with the smaller firms less affected compared to the larger firms; and (d) 17 sectors of firms, with firms in the utilities, mining, and administration sectors being the least affected.

The Credit Crisis and De Nova Mimicking in Security Analysis
Mike Cudd - Mississippi College
Marcelo Eduardo - Mississippi College
Lloyd Roberts - Mississippi College

The failure of the investment community in 2007 to foresee the systematic collapse of the credit default swap market significantly increased the complexity of security analysis and damaged the reputation of the security analyst community in general. submit that in response to the credit crisis, security analysts may have engaged in a de nova form of mimicking by increasing emphasis on general market factors and reducing emphasis on idiosyncratic factors in their valuations, driven by behavioral motives to achieve increased cost efficiency and avoid higher penalties for unfavorable outlier valuations. The result would be increased correlation among security valuations and therefore returns, and diminished benefits of diversification. We test this hypothesis by examining the patterns of security and portfolio returns surrounding the onset of the credit crisis in early 2007 and observe a significant postcrisis increase in the proportion of security and portfolio returns explained by market factors. The findings support the hypothesized shift in emphasis in security analyst valuation techniques, and provide results consistent with the hypothesized behavioral explanations.

Behavioral Finance in Joseph de la Vega's Confusion de Confusiones
Teresa Corzo - Universidad Pontificia Comillas
Margarita Prat - Universidad Pontificia Comillas
Esther Vaquero - Universidad Pontificia Comillas

In this paper, we link Joseph de la Vega's work Confusion de Confusiones, written in 1688, with current behavioral finance and propose that Vega be considered the first precursor of modern behavioral finance. In addition to describing excessive trading, overreaction and underreaction, and the disposition effect, Vega vividly portrays how investors behaved 300 years ago and includes interesting documentation on investor biases, such as herding, overconfidence, and regret aversion.

On the Internal Consistency of Stock Market Forecasts
Christian Pierdzioch - Helmut-Schmidt-University
Jan-Christoph Rülke - WHU–Otto Beisheim School of Management

Using the Livingston survey data, we test internal consistency restrictions on short-term, medium-term, and long-term stock market forecasts of the S&P 500®. We find that neither short-term forecasts are consistent with medium-term forecasts nor that medium-term forecasts are consistent with long-term forecasts. Using a forecast formation process featuring a distributed lag structure, however, we find some weak evidence of internal inconsistency of medium-term forecasts with long-term forecasts.

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