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Behavioral Finance: Investor Behavior

Paper Session

Sunday, Jan. 7, 2018 10:15 AM - 12:15 PM

Loews Philadelphia, Commonwealth Hall B
Hosted By: American Finance Association
  • Chair: Lu Zheng, University of California-Irvine

Stock Market Anomalies and Baseball Cards

Joseph Engelberg
,
University of California-San Diego
Linh Le
,
University of South Florida
Jared Williams
,
University of South Florida

Abstract

Baseball cards exhibit anomalies that are analogous to those that have been documented in financial markets, namely, momentum, price drift in the direction of past fundamental performance, and IPO underperformance. Momentum profits are higher among active players than retired players, and among newer sets than older sets. Regarding IPO underperformance, we find newly issued rookie cards underperform newly issued cards of veteran players, and that newly issued sets underperform older sets. The results are broadly consistent with models of slow information diffusion and short-selling constraints.

Culture Versus Bias: Can Social Trust Mitigate the Disposition Effect?

Jie Li
,
INSEAD
Massimo Massa
,
INSEAD
Hong Zhang
,
Tsinghua University

Abstract

We examine whether behavior bias related to mutual fund investment can be influenced by the social norms to which they are exposed. A higher level of social trust may elicit stronger investor reactions by increasing the perceived credibility of fund-reported performance. This effect enhances flow-performance sensitivity, which mitigates investors’ disposition effect. Alternatively, societal trust may reduce concerns about expropriation, thereby weakening investors’ need to react to poor performance. The resulting lower flow-performance sensitivity increases the disposition effect. Based on a proprietary dataset of complete account-level trading information for all investors in a large mutual fund family in China, we find compelling evidence 1) of a significant disposition effect among fund investors; 2) that a higher degree of social trust is associated with higher flow-performance sensitivity; and 3) that (high) trust-induced flows mitigate the disposition effect. Our results suggest that, in addition to cognitive biases, investor behavior is also strongly influenced by social norms.

Daily Winners and Losers

Alok Kumar
,
University of Miami
Stefan Ruenzi
,
University of Mannheim
Michael Ungeheuer
,
Aalto University

Abstract

The arguably most salient feature of the cross-section of stocks is being a daily winner or loser: these stocks are ranked in many newspapers and on popular webpages, making them subject to spikes in attention. In line with the literature on attention-grabbing stocks, we find that retail investor buying pressure surges when stocks are ranked. After the ranking, stocks underperform unranked stocks by 1.60% (15%-20%) during the subsequent month (three years). For unranked stocks, the idiosyncratic volatility puzzle and related anomalies (maximum daily returns, expected idiosyncratic skewness) disappear. Hence, attention-driven overpricing of daily winners and losers provides a simple explanation for several puzzling patterns in empirical asset pricing.
Discussant(s)
Jeffrey Wurgler
,
New York University
Veronika Pool
,
Indiana University
Xiaoyan Zhang
,
Purdue University
JEL Classifications
  • G1 - General Financial Markets