How do individual investors trade?

This paper examines how high-frequency trading decisions of individual investors are influenced by past price changes. Specifically, we address the question as to whether decisions to open or close a position are different when investors already hold a position compared with when they do not. Based on a unique data set from an electronic foreign exchange trading platform, OANDA FXTrade, we find that investors’ future order flow is (significantly) driven by past price movements and that these predictive patterns last up to several hours. This observation clearly shows that for high-frequency trading, investors rely on previous price movements in making future investment decisions. We provide clear evidence that market and limit orders flows are much more predictable if those orders are submitted to close an existing position than if they are used to open one. We interpret this finding as evidence for the existence of a monitoring effect, which has implications for theoretical market microstructure models and behavioral finance phenomena, such as the endowment effect.     

How do investors react under uncertainty?

It has long been accepted that risk plays an important role in determining valuation where risk reflects that investors are unsure of future returns but are able to express their prior expectations by a probability distribution of these returns. Knight (1921) introduced the concept of uncertainty where investors possess incomplete knowledge about this distribution and so are unable to formulate priors over all possible outcomes. One common approach for making uncertainty tractable is to assume that investors faced with uncertainty will base their decisions on the worst case scenario (i.e. follow maxmin expected utility). As a consequence it is postulated that investors will become more pessimistic as uncertainty increases, upgrading bad news and downgrading good news. Using Australian data, we find evidence that investors react to bad news at times of high market uncertainty but largely ignore good news which is consistent with them taking on a pessimistic bias. However, we also find evidence of the reverse when market uncertainty is low with investors taking on an optimistic stance by ignoring bad news but reacting to good news. We also find that the impact that market uncertainty has on the reaction of investors to new information is modified by the prevailing market sentiment at the time of the announcement. Besides throwing light on the question of how uncertainty impacts on investor behaviour, our findings seriously challenge the common assumption made that investors consistently deal with uncertainty by applying maxmin expected utility.     

How do bond investors perceive dividend payouts?

We explore how bond investors view corporate cash distributions through dividends and how that view influences corporate cost of debt. Explaining between 45 and 67 percent of variance in credit spreads at the time of issuance, our model reveals a non-linear association between dividend payouts and investment return expected by bondholders. In particular, while bondholders view cash disbursements in small amounts as a positive signal, large dividend payouts are viewed negatively. Our results thus provide support for both the signaling hypothesis and for the agency-cost-of-debt hypothesis. The results are robust even after controlling for firm size, growth opportunities, profitability, leverage, business risk, asset tangibility, and term structure. Exploiting the 2003 dividend tax cut as an exogenous shock, we demonstrate that our results are not vulnerable to endogeneity problems. Finally, we find no evidence of corporations timing the payouts strategically to influence the cost of debt.     

How well do investors understand loss persistence?

This paper examines investors’ expectations of loss persistence. I develop a model to forecast loss firms’ future earnings based on Joos and Plesko, The Accounting Review 80: 847–870, (2005). This model produces smaller forecast errors than two random walk models and a model that assumes losses are transitory. The results suggest that investors do not fully distinguish the differences in loss persistence captured by the model and instead appear to assume that all losses are transitory. Consequently, investors are surprised by future announcements of negative earnings for firms with predicted persistent losses, and these firms experience significantly negative abnormal returns over the following four quarters. Additional results indicate that the future negative returns of firms with predicted persistent losses are smaller in magnitude when these firms are followed by analysts. The results are robust to controls for various price anomalies and are not driven by short sale constraints.     

How do sovereign credit rating changes affect private investment?

Sovereign credit rating changes have an influence on real private investment of re-rated countries. We find significant increases in private investment growth following upgrades in sovereign ratings. These increases, however, are transitory. We also find significant, temporary declines in private investment growth following sovereign rating downgrades. The results hold after accounting for re-rated countries’ growth opportunities, endogeneity, and other factors that could affect private investment. The irreversible nature of investment may be the explanation for the temporary changes in the growth rates of physical capital investment associated with revisions in sovereign credit ratings.     

How do institutional investors influence accounting conservatism in China?

Using a sample of Chinese listed firms from 2003 to 2015, we find that domestic mutual funds have negative effects while qualified foreign institutional investors (QFIIs) have positive effects on firm accounting conservatism. These effects become stronger when their ownerships are closer to that of the controlling shareholder, respectively. Furthermore, these results are more pronounced when institutional investors are more able to monitor managers and compete with controlling shareholders. Our findings suggest that the influence of institutional investors on accounting conservatism in China is subject to their identities as well as the control contestability against the controlling shareholders.     

When do investors gamble in the stock market?

Recent studies have uncovered gambling-motivated trading activities in financial markets in which investors seek lottery-type payoffs by using financial assets. Building on prospect theory, this study provides an important complement to prior research and investigates what period that investors make gambling-motivated trading in the stock market. Examining data from the Chinese stock market, investors are revealed to have asymmetric gambling preferences in gain and loss domains. Investors' gambling motivations are more easily triggered when the market is experiencing a loss. In such periods of time, investors may preferentially opt for lottery-type stocks that offer them a small chance to earn an extreme return at the risk of a likely small loss, simply due to their ‘aversion to a sure loss’.     

Discussion of “How well do investors understand loss persistence?”

Li (Rev Acc Stud, 2011) proposes a quarterly earnings prediction model for loss generating firms, shows that it produces better specified future earnings estimates relative to naïve quarterly forecast models, and that it can be used to form a trading strategy that produces economically significant annual hedge returns. I discuss alternative perspectives on Li’s empirical results and suggest directions for future research.     

How do US investors perceive the risk of local political corruption? Evidence from acquisition announcement

This study examines the impact of local political corruption on investors’ evaluation of firms’ mergers and acquisitions (M&As) in the US. Using the number of corruption convictions of government officials reported by the US Department of Justice, we find that acquirers in more corrupt court districts experience lower acquirer announcement returns, lower combined acquirer and target announcement returns, and are less likely to complete acquisitions. We further find that the relation between local political corruption and acquirer announcement returns is worsened when acquirers operate primarily in the headquarters state. Overall, the results suggest that local political corruption has an adverse impact on investors’ evaluation of a firm’s M&A profitability.     

How do financial contracts evolve for new ventures?

While previous research has characterized the key features of contracts between entrepreneurs and venture capitalists, little is known about the contracts' evolution over time and across funding rounds. We overcome significant data challenges to compile a novel panel dataset of U.S. early-stage ventures that includes the main financial and control rights offered to investors at each (equity) funding round. We find that there is a ‘default contract’ with a distinct combination of rights that the majority of companies gravitate to. This default contract is typically implemented in the initial Series A funding round and rarely deviated from in later rounds. Whenever deviations do occur, terms are usually revised in favour of investors, and not entrepreneurs. Due to this stickiness of the default contract, for successful startups we argue that post-money valuations in later rounds can be a reasonable proxy for the economic value of the firm.     

How do we handle new health risks? Risk perception,optimism, and behaviors regarding the H1N1 virus

During Autumn 2009, individuals worldwide were confronted with a new risk, the H1N1 (swine flu) virus and vaccination programs aimed at reducing this risk. We examine the hypothesis that risk perceptions for H1N1 as well as optimism about one’s own chances of contracting H1N1 vs. those of others would impact intentions to get vaccinated against the virus as well as avoidance behaviors such as avoiding air travel, public places where people gather, and those exhibiting flu-like symptoms. To examine this hypothesis, this study uses a survey of 944 residents of Great Britain taken from 2 to 8 October 2009 by Ipsos MORI, prior to the start of the National Health Service (NHS) swine flu vaccination campaign. Controlling for respondents’ personal characteristics as well as their risk perceptions for a familiar risk (food poisoning), we find that higher perceptions about the risk of H1N1 for oneself, trust in the NHS, avoiding those with flu-like symptoms, and having an at-risk condition for H1N1 are all significant and positive predictors of intent to vaccinate against the virus. While 42% of the sample exhibited optimism about their personal risk of contracting H1N1 relative to that of the average UK resident, optimism did not predict vaccination intentions, or avoidance behaviors. Higher risk perceptions for oneself regarding susceptibility to H1N1 as well as knowing friends who have had H1N1 and having an at-risk condition for H1N1 were associated with undertaking avoidance behaviors in general and a higher number of them. We conclude that for a risk about which individuals have limited reference points and great uncertainty because of the new nature of the risk, optimism does not influence the likelihood of associated preventive or avoidance behaviors as individuals rely on their risk perceptions only about themselves.     

How do policymakers and think tank stakeholders prioritize the risks of the nuclear fuel cycle? A semantic network analysis

In recent years, the importance of stakeholder involvement and of integrating diverse perspectives into risk management has gained increasing recognition. However, it remains a challenging task to identify all potentially relevant stakeholders and to reliably describe their deeply held beliefs regarding the risks associated with complex industrial systems. For example, the development of advanced nuclear fuel cycles presents such a case. Based on a review of policy-making literatures and a content analysis of congressional records, we identify federal agencies and nonprofit policy institutes (also known as ‘think tanks’) as key stakeholders that are representative of those actively involved in making high-level decisions on the US nuclear energy policy. Using a semantic network analysis approach, we visually delineate the thematic areas of each party’s perceptions concerning fuel cycle risks. The results show that although governmental and think tank stakeholders share common concerns in areas such as nuclear waste management, the economics of nuclear facilities, and proliferation, they tend to focus on distinct aspects of each area. Moreover, while governmental stakeholders are primarily concerned with the environmental and local impacts of nuclear fuel cycles, think tank stakeholders focus more on the relative advantages and disadvantages of nuclear energy compared to other alternative energy options. Implications for risk management and risk communication are discussed.     

How do global banks scramble for liquidity? Evidence from the asset-backed commercial paper freeze of 2007

We investigate how banks scrambled for liquidity following the asset-backed commercial paper (ABCP) market freeze of August 2007 and its implications for corporate borrowing. Commercial banks in the United States raised dollar deposits and took advances from Federal Home Loan Banks (FHLBs), while foreign banks had limited access to such alternative dollar funding. Relative to before the ABCP freeze and relative to their non-dollar lending, foreign banks with ABCP exposure charged higher interest rates to corporations for dollar-denominated syndicated loans. The results point to a funding risk manifesting as currency shortages for banks engaged in maturity transformation in foreign countries.     

How do investors underreact to seasoned equity offerings? Evidence from Taiwan's corporate governance evaluation

This study examines whether long-run stock underperformance following seasoned equity offerings (SEOs) differs with a firm's corporate governance practices. We address this issue by using Taiwan's official annual corporate governance evaluation to represent the quality of firm governance. Results show that firms with better governance exhibit positive long-run post-SEO stock performance, whereas those with poor governance continue to be underperforming after SEOs. Our findings reveal that investor’ underreaction to SEOs varies with the levels of corporate governance.     

How quickly do investors react to analyst reports? Evidence from reports released outside trading hours

This study analyzes whether the publication timing of reports released outside trading hours affects subsequent price drift to determine if investors respond immediately to analyst reports. Significant price drifts are observed for revisions in target prices, especially when a report is released within two hours before the market opens. Furthermore, the influence of publication timing is crucial when investors must process information about earnings announcements and multiple reports. Conversely, the influence is irrelevant to the visibility of reports (e.g., broker size and star analyst status). The identified limitation of investors' response is attributable to their limited information-processing capacity.     

Who incentivizes the mutual fund manager,new or old shareholders?

This study tests whether mutual fund shareholders continue to trade in response to fund returns after they make their initial investment in fund shares. It decomposes the relationship between fund returns and shareholder flow in a large, proprietary panel of all shareholder transactions in one midsize no-load mutual fund family. Results show that both new and old shareholders buy shares during periods of good returns; however, shareholder outflow is essentially unrelated to fund returns. This lack of a return-sell relationship is not driven by locked-in pension assets, shareholders’ ignorance of ongoing fund returns, or embedded capital gains. However, there is evidence that exchanges between equity funds in the family are related more strongly to returns of the destination fund than to returns of the origination fund. This may indicate that flow between equity mutual funds is driven by shareholders buying new funds rather than selling old funds. Supermarket shareholders are smart insofar as they exchange into funds that subsequently outperform their prior funds during their individual holding periods.     

How do partial acquisitions affect the wealth of acquiring firms? The case of Japanese firms

This study examines how and why partial acquisitions affect the wealth of acquiring firms in Japan. Few studies have focused on acquiring firms in partial acquisitions, whereas many studies have investigated target firms. The empirical results show that the shareholder wealth of acquiring firms, which can increase through partial acquisitions, is much lower than that of target firms. In addition, acquiring firms and their targets differ in how they enhance their wealth from partial acquisitions—acquiring firms can enhance their wealth by exploiting the wealth of target firms, while target firms can enhance their wealth by obtaining support from acquiring firms.     

Digital insurance brokers—old wine in new bottles? How digital brokers create value

This article analyzes digital brokers in the countries of the DACH region, Germany, Austria, and Switzerland, from a business model perspective. We argue that the potential to create new value for insurance customers has not yet been fully realized. Our analysis has identified two strategic action areas. The first concerns the exploitation of the wealth of customer data available. Those digital brokers who will succeed in generating new content and services using data analytics have the potential to take customer centricity and individuality to new bounds. The second centers around introducing aspects of community, such as connecting peers and enabling them to interact. The critical success factors are volume, a high degree of automation as well as leveraging the infrastructure and data to delivering new, value-adding content and services that go beyond traditional intermediation.     

The 2008 global financial crisis and COVID-19 pandemic: How safe are the safe haven assets?

We compare the performance of safe-haven assets during the Global Financial Crisis (GFC) and COVID-19 pandemic. First, regarding the GFC, we find, intermediate (weak) safe haven evidence for US dollar, Swiss franc and T-bonds (Gold, Silver and T-bills). Second, with regard to COVID, we find gold is very risky in some settings, while silver has become extremely risky. Collectively, our findings suggest that the character of safe-haven assets has changed between the crises. Therefore, investors should exercise extreme care when investing in potential safe-haven assets during times of market stress.