Are the capital markets of leading industrialized nations rational and efficient? This powerful hypothesis was badly dented by the work of De Bondt and Thaler (1985) on stock…
Abstract
Purpose
Are the capital markets of leading industrialized nations rational and efficient? This powerful hypothesis was badly dented by the work of De Bondt and Thaler (1985) on stock market overreaction and by subsequent research on momentum and reversals in prices and earnings.
Design/methodology/approach
Human psychology, at times predictably irrational, drives the markets. This paper investigates this issue.
Findings
The author reviews the origins of the idea of overreaction, how behavioral insights modify standard asset pricing theory and how they contribute to our understanding of the world of finance.
Originality/value
The paper reveals the origins of the idea of overreaction, how behavioral insights modify standard asset pricing theory and how they contribute to our understanding of the world of finance.
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The purpose of this paper is to discuss the financial turmoil of 2008 that followed the collapse of the housing bubble in the USA which was the starting point of a global economic…
Abstract
Purpose
The purpose of this paper is to discuss the financial turmoil of 2008 that followed the collapse of the housing bubble in the USA which was the starting point of a global economic crisis. Huge costs are borne by every part of society. Much wealth has been destroyed. Millions of jobs have been lost. The crisis has tarnished faith in free enterprise, in the financial system, and in financial theory. Likely, the era of laissez‐faire capitalism that started during the Reagan‐Thatcher years is ending. We are entering a period of profound uncertainty. It is imperative that the moral dimension of capitalism be restored.
Design/methodology/approach
The paper is based on a review of theory and historical evidence relating to financial bubbles and financial regulation.
Findings
The author offers suggestions on how to rebuild the global financial system. We need: a systemic risk regulator, independent from business and political influence; higher capital requirements for all systemically significant financial service firms; restrictions on proprietary trading in commercial banks; transparency in derivatives; new ways to compensate bankers that reduce the incentive to take excessive risks; consumer protection against defective financial products; and the re‐establishment of the principle of fiduciary duty.
Practical implications
The paper lists practical suggestions on how to reform the global financial system.
Social implications
Economic success is based on trust. After the 2008 crisis, regulatory reform is the best way to rebuild trust in the financial system.
Originality/value
The paper offers a unique perspective based in part on insights drawn from behavioral finance.
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Hajer Chenini and Anis Jarboui
A separate study of the different behavioral biases does not allow for a full understanding of the complexity and stability of the heterogeneity of beliefs. Therefore, through a…
Abstract
Purpose
A separate study of the different behavioral biases does not allow for a full understanding of the complexity and stability of the heterogeneity of beliefs. Therefore, through a more global view of these anomalies, the authors wish to show that they can converge on a single concept, which is the heterogeneity of beliefs.
Design/methodology/approach
It is therefore essential to stress that the importance of this study is mainly reflected in the methodological approach used in the construction and analysis of the map and not only in the results achieved. This contribution states that structural analysis, as a means of building the cognitive map, can facilitate the task of investors and other decision-makers, in the identification and analysis of the heterogeneity of beliefs that can therefore guide investors' strategy in decision-making.
Findings
The authors have studied the behavior of the investor and its way of interpreting the information and the authors have emphasized the value of studying the concept of heterogeneity of beliefs in its complexity. So that part of the work seems to be relevant and crucial to filling, if you will, that void. In this sense, the authors have shown that behavioral abnormalities are multidimensional concepts: “self-deception”, “cognitive bias”, “emotional bias” and “social bias”.
Originality/value
In particular, this article will aim to achieve the objective of proposing a model for measuring the heterogeneity of beliefs. Thus, the authors want to show that the heterogeneity of beliefs can be measured directly through the different behavioral anomalies.
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The purpose of this paper is to depict how the author's way from standard finance to the first and second generations of behavioral finance illustrates the ongoing general…
Abstract
Purpose
The purpose of this paper is to depict how the author's way from standard finance to the first and second generations of behavioral finance illustrates the ongoing general transition.
Design/methodology/approach
The first generation, starting in the early 1980s, largely accepted standard finance's notion of people's wants as “rational” wants – restricted to the utilitarian benefits of high returns and low risk. That first generation commonly described people as “irrational” – succumbing to cognitive and emotional errors and misled on their way to their rational wants. The second generation describes people as normal.
Findings
It begins by acknowledging the full range of people's normal wants and their benefits – utilitarian, expressive and emotional – distinguishes normal wants from errors and offers guidance on using shortcuts and avoiding errors on the way to satisfying normal wants. People's normal wants include financial security, nurturing children and families, gaining high social status and staying true to values. People's normal wants, even more than their cognitive and emotional shortcuts and errors, underlie answers to important questions of finance, including saving and spending, portfolio construction, asset pricing and market efficiency.
Originality/value
The article identifies that people's normal wants include financial security, nurturing children and families, gaining high social status and staying true to values. People's normal wants, even more than their cognitive and emotional shortcuts and errors, underlie answers to important questions of finance, including saving and spending, portfolio construction, asset pricing and market efficiency.
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The authors compare sentiment level with sentiment shock from different angles to determine which measure better captures the relationship between sentiment and stock returns.
Abstract
Purpose
The authors compare sentiment level with sentiment shock from different angles to determine which measure better captures the relationship between sentiment and stock returns.
Design/methodology/approach
This paper examines the relationship between investor sentiment and contemporaneous stock returns. It also proposes a model of systems science to explain the empirical findings.
Findings
The authors find that sentiment shock has a higher explanatory power on stock returns than sentiment itself, and sentiment shock beta exhibits a much higher statistical significance than sentiment beta. Compared with sentiment level, sentiment shock has a more robust linkage to the market factors and the sentiment shock is more responsive to stock returns.
Originality/value
This is the first study to compare sentiment level and sentiment shock. It concludes that sentiment shock is a better indicator of the relationship between investor sentiment and contemporary stock returns.
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Kiryanto Kiryanto, Indri Kartika and Zaenudin Zaenudin
Certification information published by a company will be responded by the market. Therefore, the purpose of this study is to examine the impact of ISO 9001 certification on the…
Abstract
Purpose
Certification information published by a company will be responded by the market. Therefore, the purpose of this study is to examine the impact of ISO 9001 certification on the stock market reaction as indicated by stock returns reaction of companies in Indonesia.
Design/methodology/approach
This study used event study method with the period of 13 days. It consists of 6 days before and after ISO 9001 certification announcement and 1 day at the time of the event. It analyzed by using pair sample t-test and one sample t-test. The stock return data is obtained from companies that are ISO 9001 certified and it tested for their stock reactions before and after the certification.
Findings
The results of empirical research showed that the average and companies cumulative abnormal returns in Indonesia react quickly and positively on the first day after ISO 9001 certification announcement. This study proved the differences between abnormal returns before and after the ISO 9001 certification announcement period.
Research limitations/implications
The company's success in implementing ISO 9001 will have an impact on investment in the capital market with a positive response from stock market players. The implication of this study is the further research can examine directly the impact of ISO 9001 implementation on investor behavior in the capital market.
Originality/value
Based on the development of the literature review, this is the first study which examined the impact of ISO 9001 certification announcement on investor reactions in the short term. Therefore, companies in Indonesia need to implement a quality management system for investors in Indonesia.
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Nektarios Gavrilakis and Christos Floros
The purpose of this paper is to identify whether heuristic and herding biases influence portfolio construction and performance in Greece. The current research determines the…
Abstract
Purpose
The purpose of this paper is to identify whether heuristic and herding biases influence portfolio construction and performance in Greece. The current research determines the situation among investors in Greece, a country with several economic problems for the last decade.
Design/methodology/approach
A survey has been conducted covering a group of active private investors. The relationship between private investors' behavior and portfolio construction and performance was tested using a multiple regression.
Findings
The authors find that heuristic variable affects private investor's portfolio construction and performance satisfaction level positively. A robustness test on a second group, consisting of professional investors, reveals that heuristic and herding biases affect investment behavior when constructing a portfolio.
Practical implications
The authors recommend investors to select professional's investment portfolio tools in constructing investment portfolios and avoid excessive errors, which occur due to heuristic. The awareness and understanding of heuristic and herding could be helpful for professionals and decision-makers in financial institutions by improving their performance resulting in more efficient markets.
Originality/value
The main contribution of this paper lies in the fact that it is the first study on two major behavioral dimensions that affect the investor's portfolio construction and performance in Greece. The rationale of the current research is that the results are helpful for investors in order to take rational, reliable and profitable decisions.
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Seonghee Oak and Michael C. Dalbor
The aim of this study is to investigate institutional investment behavior relating to lodging firms and their brand equity.
Abstract
Purpose
The aim of this study is to investigate institutional investment behavior relating to lodging firms and their brand equity.
Design/methodology/approach
Ordinary least squares (OLS) and two‐stage least squares (2SLS) regressions are used. The dependent variable is institutional investor percentage and the independent variables are advertising expenditures, size, capital expenditures, proxy Q, debt ratio, price, share turnover and year.
Findings
The study found that institutional investors' holdings are positively related to advertising expenditures. There is a significant difference in institutional holdings between lodging firms with advertising expenditures and those without. Institutions favor lodging firms that have lower debt ratios. Institutional investors prefer small firms because they typically offer superior returns.
Research limitations/implications
Further research may be done to see whether individual investors favor firms with brand equity. Additional research may be conducted in other segments, such as restaurants or casinos.
Practical implications
Findings may help lodging managers in raising financial capital from institutional investors; researchers in conducting future research on institutional investors; and educators in better describing institutional investors' important roles to hospitality students.
Originality/value
The paper is the first to show a relationship between institutional investors and advertising expenditures in the lodging industry.