The stock market is a complex system where numerous sources of information affect investor trading decisions. These decisions impact the value of shares of a company’s stock. However, the stock market is largely unpredictable. No one knows precisely how much a particular piece of information will change the affected company’s trading price. Behavioral finance is a popular concept that seeks to identify how feelings and emotions can drive stock market changes. Considering how a CEO influences a company’s performance, the public’s perception of a CEO may also impact that company’s share value by extension. This paper explores the potential correlation between the CEO factor and stock price adjustments.
{"title":"The CEO Factor: Public Perception and Stock Price","authors":"Michele LaFevre","doi":"10.2139/ssrn.3906966","DOIUrl":"https://doi.org/10.2139/ssrn.3906966","url":null,"abstract":"The stock market is a complex system where numerous sources of information affect investor trading decisions. These decisions impact the value of shares of a company’s stock. However, the stock market is largely unpredictable. No one knows precisely how much a particular piece of information will change the affected company’s trading price. Behavioral finance is a popular concept that seeks to identify how feelings and emotions can drive stock market changes. Considering how a CEO influences a company’s performance, the public’s perception of a CEO may also impact that company’s share value by extension. This paper explores the potential correlation between the CEO factor and stock price adjustments.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"160 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-08-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115995875","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
P. Andreou, Turan G. Bali, Anastasios Kagkadis, N. Lambertides
This paper shows that firm growth potential – representing a firm's yet-unexercised growth opportunities – is associated with option overpricing and low future delta-hedged option returns. We provide an explanation of this phenomenon based on the idea that retail investors exert buying pressure and tend to overpay for the call options of growth-oriented firms because they overestimate the potential profits arising from the return skewness of the underlying stocks. We further show that the effect is stronger among stocks that are more likely to exhibit high skewness, are more prone to limits-to-arbitrage and are more exposed to informational frictions.
{"title":"Firm Growth Potential and Option Returns","authors":"P. Andreou, Turan G. Bali, Anastasios Kagkadis, N. Lambertides","doi":"10.2139/ssrn.3874674","DOIUrl":"https://doi.org/10.2139/ssrn.3874674","url":null,"abstract":"This paper shows that firm growth potential – representing a firm's yet-unexercised growth opportunities – is associated with option overpricing and low future delta-hedged option returns. We provide an explanation of this phenomenon based on the idea that retail investors exert buying pressure and tend to overpay for the call options of growth-oriented firms because they overestimate the potential profits arising from the return skewness of the underlying stocks. We further show that the effect is stronger among stocks that are more likely to exhibit high skewness, are more prone to limits-to-arbitrage and are more exposed to informational frictions.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116137644","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine how the trade shock from China influences the behavior and investment performance of overconfident CEOs in U.S. firms. We show that the rise of Chinese import competition curbs investments and improves investment value and acquisition performance for firms with overconfident CEOs. Intensified Chinese product competition also reduces the incentives for these firms to expand assets, invest out of cash flows, pursue aggressive financial policies, and increase risk exposure, and enhances their incentives to buy back shares. Overall, the evidence suggests that product market competition is an effective external governance mechanism for curbing the adverse effects of managerial overconfidence.
{"title":"Does Import Competition from China Discipline Overconfident CEOs in U.S. Firms?","authors":"Sheng-Syan Chen, Shu-Cing Peng, Chia-Wei Yeh","doi":"10.2139/ssrn.3854562","DOIUrl":"https://doi.org/10.2139/ssrn.3854562","url":null,"abstract":"We examine how the trade shock from China influences the behavior and investment performance of overconfident CEOs in U.S. firms. We show that the rise of Chinese import competition curbs investments and improves investment value and acquisition performance for firms with overconfident CEOs. Intensified Chinese product competition also reduces the incentives for these firms to expand assets, invest out of cash flows, pursue aggressive financial policies, and increase risk exposure, and enhances their incentives to buy back shares. Overall, the evidence suggests that product market competition is an effective external governance mechanism for curbing the adverse effects of managerial overconfidence.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"116 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-05-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127987131","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper experimentally tests the Fox-Tversky (1995) source preference hypothesis as axiomatized in Chew and Sagi (2008) where people may have preference between equally distributed risks depending on the underlying sources of uncertainty. We study two forms of source preference. One is based on familiarity of risks arising from the trailing digit of stock prices in the home city exchange. Another is based on the trailing digit of the market index of the home city versus that of a foreign city. We find a familiarity-based source preference in portfolios comprising strictly dominated bets associated with more familiar stocks and in valuation of bets elicited using an ascending-price auction. Complementarily, we find a home bias in terms of Shanghai (Hong Kong) subjects preferring to bet on the trailing digit of the Shanghai Stock Exchange Index (Hang Seng Index) even though the same bets based on Dow Jones Industrial Average would pay more. Taken together, our study suggests that home bias is driven mainly by source preference rather than ambiguity aversion.
{"title":"Experimental Evidence of Source Preference: Familiarity and Home Bias","authors":"S. Chew, K. Li, Jacob S. Sagi","doi":"10.2139/ssrn.3870716","DOIUrl":"https://doi.org/10.2139/ssrn.3870716","url":null,"abstract":"This paper experimentally tests the Fox-Tversky (1995) source preference hypothesis as axiomatized in Chew and Sagi (2008) where people may have preference between equally distributed risks depending on the underlying sources of uncertainty. We study two forms of source preference. One is based on familiarity of risks arising from the trailing digit of stock prices in the home city exchange. Another is based on the trailing digit of the market index of the home city versus that of a foreign city. We find a familiarity-based source preference in portfolios comprising strictly dominated bets associated with more familiar stocks and in valuation of bets elicited using an ascending-price auction. Complementarily, we find a home bias in terms of Shanghai (Hong Kong) subjects preferring to bet on the trailing digit of the Shanghai Stock Exchange Index (Hang Seng Index) even though the same bets based on Dow Jones Industrial Average would pay more. Taken together, our study suggests that home bias is driven mainly by source preference rather than ambiguity aversion.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"34 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123933532","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We explore if sleep deprivation affects how investors react to relevant news. Using the transition to Daylight Saving Time (DST) in the spring as a disruption to sleeping patterns, we show that investors underreact to a firm’s earnings surprise in the days after the transition to DST. Further, an earnings surprise in the days after the transition to DST is associated with a positive drift in the post-announcement period. Our findings are consistent with sleep-deprived investors mispricing and subsequently reassessing relevant information. Overall, our results highlight the importance of investors' cognitive ability for efficient market pricing.
{"title":"Let Me Sleep on It: Sleep and Investor Reactions to Earnings Surprises","authors":"Jens Hagendorff, Angelica Gonzalez, Xuhao Li","doi":"10.2139/ssrn.3803494","DOIUrl":"https://doi.org/10.2139/ssrn.3803494","url":null,"abstract":"We explore if sleep deprivation affects how investors react to relevant news. Using the transition to Daylight Saving Time (DST) in the spring as a disruption to sleeping patterns, we show that investors underreact to a firm’s earnings surprise in the days after the transition to DST. Further, an earnings surprise in the days after the transition to DST is associated with a positive drift in the post-announcement period. Our findings are consistent with sleep-deprived investors mispricing and subsequently reassessing relevant information. Overall, our results highlight the importance of investors' cognitive ability for efficient market pricing.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"236 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132086937","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Why are stock prices much more volatile than the underlying dividends? The excess volatility of prices can in principle be attributed to two different causes: time-varying discount rates for expected future dividends, arising from variation in risk premia; or the irrational exuberance of investors, bidding prices up and down even in the absence of changes in the underlying value of the asset. No consensus has so far emerged among economists as to the prevalence of one or the other source of price variation. I propose in this paper a novel way to approach this problem, by identifying changes in the uncertainty faced by investors regarding the fundamental value of an asset and exploiting the different response in prices that such changes in uncertainty would generate through sentiments or risk premia. I then apply this framework to the S&P 500 index from 1872 till 2019: the positive correlation found between movements in uncertainty and in prices (or, equivalently, the negative correlation between movements in uncertainty and in implied risk premia) is not compatible with rational investors' behavior and suggests instead the presence of a significant sentiments component in stock prices.
{"title":"Uncertainty, Sentiments and Time-Varying Risk Premia","authors":"M. Berardi","doi":"10.2139/ssrn.3816554","DOIUrl":"https://doi.org/10.2139/ssrn.3816554","url":null,"abstract":"Why are stock prices much more volatile than the underlying dividends? The excess volatility of prices can in principle be attributed to two different causes: time-varying discount rates for expected future dividends, arising from variation in risk premia; or the irrational exuberance of investors, bidding prices up and down even in the absence of changes in the underlying value of the asset. No consensus has so far emerged among economists as to the prevalence of one or the other source of price variation. I propose in this paper a novel way to approach this problem, by identifying changes in the uncertainty faced by investors regarding the fundamental value of an asset and exploiting the different response in prices that such changes in uncertainty would generate through sentiments or risk premia. I then apply this framework to the S&P 500 index from 1872 till 2019: the positive correlation found between movements in uncertainty and in prices (or, equivalently, the negative correlation between movements in uncertainty and in implied risk premia) is not compatible with rational investors' behavior and suggests instead the presence of a significant sentiments component in stock prices.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"57 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-02-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131520902","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper investigates the risk and return properties of a trading strategy for the cryptocurrency market. The main predictive power for portfolio formation comes from a simple prospect theory model that only uses price information readily available. The dataset consists of a large body of cryptocurrencies from 2014 to 2020. I find a strong outperformance over the market, even after controlling for known predictors. Factor regressions with a cryptocurrency three-factor model further reveal significant alphas. Robustness test emphasize the legitimacy of the strategy. On average, cryptocurrencies with a high (low) prospect theory value earn low (high) subsequent returns. Interestingly, traders in the cryptocurrency market seem to assess the attractiveness of cryptocurrency in a way described by prospect theory. Mechanical tests of the model show that probability weighting is a main driver behind this assessment. Cryptocurrencies with a high prospect theory value tend to be highly positively skewed. This skewness could be the reason why the cryptocurrency seems attractive to traders, similar to lottery-like gambles.
{"title":"A Prospect Theory Model for Predicting Cryptocurrency Returns","authors":"Alexander Thoma","doi":"10.2139/ssrn.3753530","DOIUrl":"https://doi.org/10.2139/ssrn.3753530","url":null,"abstract":"This paper investigates the risk and return properties of a trading strategy for the cryptocurrency market. The main predictive power for portfolio formation comes from a simple prospect theory model that only uses price information readily available. The dataset consists of a large body of cryptocurrencies from 2014 to 2020. I find a strong outperformance over the market, even after controlling for known predictors. Factor regressions with a cryptocurrency three-factor model further reveal significant alphas. Robustness test emphasize the legitimacy of the strategy. On average, cryptocurrencies with a high (low) prospect theory value earn low (high) subsequent returns. Interestingly, traders in the cryptocurrency market seem to assess the attractiveness of cryptocurrency in a way described by prospect theory. Mechanical tests of the model show that probability weighting is a main driver behind this assessment. Cryptocurrencies with a high prospect theory value tend to be highly positively skewed. This skewness could be the reason why the cryptocurrency seems attractive to traders, similar to lottery-like gambles.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115595066","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A central conjecture of behavioural finance is that arbitrage opportunities appear as a result of systematic irrational investment behaviour and persist since real-world arbitrage trades actually involve costs and risks due to market frictions and non-fundamental risk. This paper shows that the no-arbitrage condition can emerge from the market selection process even if systematic irrational trading behaviour occurs permanently and there are no strategic arbitrage trades. The model consists of two types of agents and two assets. Dividends are independently and identically distributed over time. Both types of agents invest positive amounts of wealth into each asset and keep portfolio weights constant. Arbitrage opportunities naturally occur in the short and medium term depending on how both types invest but disappear in the long run if both types survive the market selection process - regardless of both types' portfolios and initial wealth distribution. A necessary condition for arbitrage opportunities to persist is that one type of agents drives the other one out of the market.
{"title":"Market Selection and the Absence of Arbitrage","authors":"Sabine Elmiger","doi":"10.2139/ssrn.3746988","DOIUrl":"https://doi.org/10.2139/ssrn.3746988","url":null,"abstract":"A central conjecture of behavioural finance is that arbitrage opportunities appear as a result of systematic irrational investment behaviour and persist since real-world arbitrage trades actually involve costs and risks due to market frictions and non-fundamental risk. This paper shows that the no-arbitrage condition can emerge from the market selection process even if systematic irrational trading behaviour occurs permanently and there are no strategic arbitrage trades. The model consists of two types of agents and two assets. Dividends are independently and identically distributed over time. Both types of agents invest positive amounts of wealth into each asset and keep portfolio weights constant. Arbitrage opportunities naturally occur in the short and medium term depending on how both types invest but disappear in the long run if both types survive the market selection process - regardless of both types' portfolios and initial wealth distribution. A necessary condition for arbitrage opportunities to persist is that one type of agents drives the other one out of the market.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"40 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127494144","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Internet Appendix: Does Wealth Play a Role in Socially Responsible Mutual Fund Investing?","authors":"C. Christiansen, T. Jansson, Malene Kallestrup Lamb, Vicke Norén","doi":"10.2139/ssrn.3727356","DOIUrl":"https://doi.org/10.2139/ssrn.3727356","url":null,"abstract":"Internet Appendix: Does Wealth Play a Role in Socially Responsible Mutual Fund Investing?<br><br>The paper is available at SSRN:<br><br><a href=\"https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3128432\">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3128432</a>","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"81 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126221039","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Exploring the Paycheck Protection Program, a setting that allows clear identification of relationship lending effects during the COVID-19 crisis, we find that relationship borrowers receive economically significant larger loans and faster approvals. In the absence of lenders' information advantage motivation documented in prior literature, because the program disregards borrower's credit risk, we examine alternative channels for these benefits. We find that lenders prioritize relationship borrowers mainly due to concerns with the increasing risk of default on borrowers' pre-crisis debt in their portfolios. The benefits we document come with costs. Borrowers are more likely to violate PPP rules when a relationship exists.
{"title":"The Relevance of Relationship Lending in Times of Crisis","authors":"Dan Amiram, Daniel Rabetti","doi":"10.2139/ssrn.3701587","DOIUrl":"https://doi.org/10.2139/ssrn.3701587","url":null,"abstract":"Exploring the Paycheck Protection Program, a setting that allows clear identification of relationship lending effects during the COVID-19 crisis, we find that relationship borrowers receive economically significant larger loans and faster approvals. In the absence of lenders' information advantage motivation documented in prior literature, because the program disregards borrower's credit risk, we examine alternative channels for these benefits. We find that lenders prioritize relationship borrowers mainly due to concerns with the increasing risk of default on borrowers' pre-crisis debt in their portfolios. The benefits we document come with costs. Borrowers are more likely to violate PPP rules when a relationship exists.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"56 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129689969","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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