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Behavioral Finance

Paper Session

Friday, Jan. 5, 2018 2:30 PM - 4:30 PM

Loews Philadelphia, Lescaze
Hosted By: Association of Financial Economists & American Economic Association
  • Chair: Michaela Pagel, Columbia University

The Dividend Disconnect

Samuel M. Hartzmark
,
University of Chicago
David H. Solomon
,
University of Southern California

Abstract

Many individual investors, mutual funds and institutions trade as if dividends and capital gains are disconnected attributes, not fully appreciating that dividends come at the expense of price decreases. Behavioral trading patterns (e.g. the disposition effect) are driven by price changes excluding dividends and investors trade as if dividends are a separate stable income stream. Demand for dividends is systematically higher in periods of low interest rates and poor market performance, leading to lower future returns for dividend-paying stocks. Investors rarely reinvest dividends, instead purchasing other stocks. This creates predictable marketwide price increases on days of large dividend payouts.

Financial Advisors and Risk-taking

Steve Foerster
,
University of Western Ontario
Juhani T. Linnainmaa
,
University of Southern California
Brian T. Melzer
,
Federal Reserve Bank of Chicago
Alessandro Previtero
,
Indiana University

Abstract

We show that financial advisors increase stock market participation and risk-taking. We first exploit a regulatory change in Canada that restricted the supply of financial advisors in all provinces except Quebec. Our estimates suggest that having a financial advisor increases stock market participation and reduces investments in cash accounts. We also use micro-level data on financial advisory accounts to document that the length of the advisor-client relationship - a measure of trust - increases clients' willingness to take financial risk. Using exogenous shocks to advisor-client pairings as an instrument for the relationship length, we find that clients who started with a new advisor before the 2007-2009 financial crisis were less likely to remain invested in the stock market throughout the crisis.

Analysts and Anomalies

Joseph Engelberg
,
University of California-San Diego
David R. McLean
,
Georgetown University
Jeffrey Pontiff
,
Boston College

Abstract

Analysts’ price targets and recommendations contradict stock return anomaly variables. Analysts’ one-year return forecasts are 31% for anomaly-longs and 44% for anomaly-shorts. Similarly, analysts issue more favorable recommendations for anomaly-shorts than anomaly-longs. We find similar results among all-star analysts. Our findings imply that investors who follow actionable, analyst information contribute to mispricing.

One Brief Shining Moment(um): Past Momentum Performance and Momentum Reversals

Usman Ali
,
MIG Capital
Kent Daniel
,
Columbia University
David Hirshleifer
,
University of California-Irvine

Abstract

Motivated by behavioral theories, we test whether recent past performance of the momentum strategy (Past Momentum Performance--PMP) negatively predicts the performance of stale momentum portfolios. Following periods of top-quintile PMP, momentum portfolios exhibit strong reversals 2-5 years after formation, whereas, following periods of bottom-quintile PMP, stale momentum portfolios earn positive returns. The difference in cumulative five-year Fama-French alphas for momentum portfolios formed in high- and low-PMP months is 40%. A value-weighted trading strategy based on this effect generates an alpha of 0.40% per month (t = 3.74). These patterns are confirmed in international data. These findings present a puzzle for existing theories of momentum.
Discussant(s)
Malcolm Baker
,
Harvard Business School
Kim Peijnenburg
,
HEC Paris
Eric So
,
Massachusetts Institute of Technology
Tobias J. Moskowitz
,
Yale University
JEL Classifications
  • G2 - Financial Institutions and Services
  • Y9 - Other