A decision-theoretic model of asset-price underreaction and overreaction to dividend news

We combine new developments in decision theory with a standard consumption-based asset-pricing framework. In our model the efficient market hypothesis is violated if and only if agents’ beliefs express ambiguity about the stochastic process driving economic fundamentals. Asset price fluctuations result because agents with ambiguous beliefs are prone to a confirmatory bias in the interpretation of new information. We demonstrate that our approach gives rise to price-patterns of “underreaction” and “overreaction” to news about dividend payments. Although these empirical phenomena have received significant attention in the behavioral finance literature, we argue that our decision-theoretic underpinning of psychological attitudes has a less ad hoc flavor than existing approaches.     

Financial reporting complexity and investor underreaction to 10-K information

We study the immediate and delayed market reaction to U.S. Securities and Exchange Commission (SEC) EDGAR 10-K filings. Unusual trading volumes and stock-price movements are documented during the days around the 10-K filing dates. The abnormal price movements are positively associated with future accounting profitability, indicating that 10-K reports contain useful information about future firm performance. In addition, investors’ reaction to 10-K information seems sluggish, as demonstrated by the stock-price drift during the 12-month period after 10-K filing. We find that investors’ underreaction tends to be stronger for firms with more complex 10-K reports.     

The effects of analyst forecasts and earnings trends on perceptions of management forecast credibility

We examine whether analyst forecasts influence investors’ perceptions of the credibility of a good news management earnings forecast. We hypothesize that the effect of analyst forecasts will depend on whether the analyst forecast confirms management’s forecast and the extent to which management’s forecast is consistent with the prior earnings trend. Findings indicate that the positive effect of a confirming analyst forecast is greater when the management forecast is trend inconsistent than when it is trend consistent. The negative effect of a disconfirming analyst forecast does not differ based on management forecast trend consistency.     

Analyst underreaction and the post-forecast revision drift

The post-forecast revision drift (PFRD), the phenomenon of delayed stock price reactions to analyst forecast revisions, is a well-documented market anomaly. Prior research attributes PFRD to underreaction by investors to analyst forecast revisions. This study investigates the role of the analyst forecast revision process itself in the PFRD anomaly. Using a large sample of US firms, we confirm prior findings of a positive serial correlation (momentum) in individual analysts’ revisions to their earnings forecasts and, based on both indirect and direct tests, document a positive association between this momentum and PFRD. Further analyses reveal that both the forecast revision momentum and PFRD vary in similar ways with respect to the nature of the news driving the revisions and the information environment. Collectively, our findings show that underreaction by individual analysts in the forecast revision process is an important contributor to the PFRD phenomenon.     

Overreaction and underreaction in the foreign exchange market

Research has documented overreaction and underreaction for stocks and stock market indices, but it has not yet analyzed these phenomena with regard to currency exchange rates. This paper examines exchange rate changes following extreme 1-day fluctuations for currencies in industrialized and emerging markets. In this study, the exchange rate is defined as the number of foreign currency units per US dollar. An overreaction phenomenon for currencies in emerging markets and an underreaction phenomenon for currencies in industrial markets are found. Each extreme 1-day currency fluctuation event is classified according to the type of underlying reason as described in the Wall Street Journal. Events for which no announcements (undefined events) were found are associated with a stronger tendency toward overreaction than those events for which an explanation was given (defined events). This suggests that investors overreact more when the source of the extreme fluctuation is largely unknown. The defined events are classified into two groups: economic events and political events. There is some evidence that political events are associated with a stronger tendency toward overreaction than economic events. These findings can be attributed to uncertainty. Political events (e.g., civil uprising) should be more difficult to assess than economic events (e.g., the release of an inflation report), and undefined events should be associated with the largest degree of uncertainty. Cross-sectional analysis is used to relate post-event exchange rate changes to the magnitude of the initial exchange rate change, leakage, day of the week effects, type of currency (from emerging or industrial market), and the type of announcement (economic, political, or undefined) that appeared in the Wall Street Journal. The cross-sectional analysis confirms that currencies in emerging markets experience stronger degrees of overreaction than those of industrial markets, even after controlling for potentially confounding factors. Moreover, it confirms that undefined events experience stronger degrees of overreaction than defined events, even when controlling for other factors.     

Management earnings forecast and financial statement complexity

We investigate the manager’s earnings forecasting strategy when financial statement complexity becomes a significant issue in capital markets. We suppose that complexity in financial statements arises from complexity of firm’s business transactions (business complexity) or complexity of associated reporting standards (reporting complexity) as mentioned in Guay et al. (2016). We find that a manager’s forecasting strategy depends on whether financial statement complexity stems from business or reporting complexity. Specifically, we indicate, among other observations, that managers who initially announced optimistic earnings forecasts will revise and release pessimistic earnings forecasts when financial statement complexity stems from reporting complexity.     

The credibility approach to experience rating

Summary

Chapter 1 presents the problem of experience rating and the objective of credibility theory. In Chapter 2 the so-called “limited fluctuation credibility theory” is presented briefly. The far more important and developed “greatest accuracy credibility theory” is introduced in Chapter 3. The discussion in Chapters 1–3 is carried through with a minimum of mathematics, the aim being to explain the basic ideas and techniques. A fuller account of the greatest accuracy theory is given in Chapter 4. The division of the matter into paragraphs reflects the distinction between what can be called the classical or empirical Bayes point of view and the (purely) Bayesian point of view. In Chapter 5 are mentioned some selected problems related to practical applications of the theory.     

The underreaction hypothesis and the new issue puzzle: evidence from Japan

This article investigates the long-term equity performance ofJapanese firms issuing convertible debt and equity. We findthat issuing firms perform poorly (except for equity rightsissues) compared to nonissuing firms even though the stock-pricereaction to convertible debt and equity issues is not negativefor Japanese firms. This underperformance is strongest for firmsissuing public convertible debt. In contrast to the United States,poor performance is not concentrated in smaller firms and infirms with a high market-to-book ratio. Simple behavioral explanationsadvanced for the new issue puzzle in the United States do notseem consistent with the Japanese experience.     

Management reporting incentives and classification credibility: The effects of reporting discretion and reputation

In this study we investigate how the level of discretion in the reporting environment and management’s reporting reputation influence the extent to which management’s reporting incentives are important in determining the perceived credibility of management’s classification choices. Consistent with prior research, we show that users view incentive-inconsistent classifications as more credible than incentive-consistent classifications. We extend this finding by showing that the strength of this relationship (i.e., the extent to which users consider the consistency between the classification and management’s reporting incentives) depends on the level of discretion in the reporting environment and management’s reporting reputation. We find that users rely less (more) on the consistency between management’s reporting incentives and the classification in a mandated (discretionary) reporting environment and when managers have a good (poor) reporting reputation. We conclude by discussing the implications of our findings and potential future research.     

Management earnings forecast disclosure policy and the cost of equity capital

We examine the relation between management earnings forecast disclosure policy and the cost of equity capital in a cross-section of 1,355 firms over a 4-year post-Regulation Fair Disclosure period (2001 through 2004). We find evidence of a negative association between the quality of management earnings forecasting policy and cost of equity capital, and we document that the strength of the association is greater for firms with higher disclosure costs and for firms with more relevant quarterly management earnings forecasts. Our results are robust to the use of multiple methods to address both endogeneity and the measurement error in firm-specific estimates of implied cost of equity capital.     

On time-heterogeneous credibility estimation

Abstract

Let χ_i be the total claim amount of an insurance policy in calendar year i. We assume that the χ_i's are conditionally independent given an unknown random parameter ø, and that for all i. In the present paper it is under these assumptions shown how to calculate the credibility estimator of m(ø) by recursive updating. We also give estimators for the unknown parameters α_i, β_i, and ?_i based on portfolio data. Finally we mention some related models.     

Productivity and credibility in industry equilibrium

I analyze a model of production in a competitive environment with heterogeneous firms. Efficient production requires individuals within the organization to take noncontractible actions for which rewards must be informally promised rather than contractually assured. The credibility of such promises originates from a firm's future competitive rents. In equilibrium, heterogeneous firms are heterogeneously constrained, and competitive rents are inefficiently concentrated at the top. I explore several policy and empirical implications of this result.     

观察与展望：值得关注的新产业（续一）

本刊今年第2期刊登《观察与展望：几个值得关注的新产业》,对几个新兴展业的投资价值做了分析,本刊将继续介绍,供参考     

Using corporate social responsibility performance to evaluate financial disclosure credibility

Due to the paucity of immediate and direct information about financial disclosure credibility, it is often difficult for investors to assess the credibility of financial disclosures (e.g. whether reported earnings are biased). Given this situation, the present study proposes and finds that investors use additional cues, such as information about corporate social responsibility (CSR) performance, to form overall impressions about management's honesty, credibility, and trustworthiness. Similar to other findings in the halo effect literature, we find that these overall impressions subsequently influence both investors' assessments of financial disclosure credibility and the prices they are willing to pay for a company's stock. The findings support the theoretical framework on financial disclosure credibility by (1) showing that management credibility is an important tool that investors use to assess disclosure credibility and (2) suggesting that management credibility is a multidimensional latent construct for which CSR performance can be one of several relevant indicators.     

注册会计师道德诚信守护的机制建设

在规模的资本市场中,不同的市场主体都会变得更加成熟和理性,尤其是投资者。在这样一个环境里,注册会计师要努力     

Imperfect credibility and the zero lower bound

As the nominal interest rate cannot fall below zero, a central bank with imperfect credibility faces a significant challenge to stabilize the economy in a New Keynesian model during a large recession. We characterize the optimal monetary policy at the zero lower bound for the nominal interest rate if credibility is imperfect. Confronting monetary policy communication of the U.S. Federal Reserve and the Swedish Riksbank with such a framework, the credibility of both institutions is shown to have been low in the aftermath of the 2008 economic crisis.