Individual investors' responses to mutual fund fire sales and sell-side analysts' price-correcting revisions

PurposeThis paper investigates individual investors' responses to stock underpricing and how their trading decisions are affected by analysts' forecasts and recommendations.Design/methodology/approachThis empirical study uses mutual fund fire sales as an exogenous source that causes stock underpricing and analysts' forecasts and recommendations as price-correcting information. The study further uses regression analysis to examine individual investors' responses to fire sales and how their responses vary with price-correcting information.FindingsThe authors first show that individual investors respond to mutual fund fire sales by significantly decreasing net buys, and this effect appears to be prolonged. Next, the authors find that the decrease of net buys diminishes following analysts' price-correcting earnings forecast revisions and stock recommendation changes. Hence, the authors suggest that individual investors are not “wise” enough to recognize flow-driven underpricing; however, this response is weakened by analysts' price-correcting information.Originality/valueThere is an ongoing debate in the literature about whether individual investors should be portrayed as unsophisticated traders or informed traders who can predict future returns. The authors study a unique information event and provide new evidence related to both perspectives. Overall, our evidence suggests that the “unsophisticated traders” perspective is predominant, whereas a better information environment significantly reduces individual investors' information disadvantage. This finding could be of interest to both academic researchers and regulators.

Download Full-text

A study of prominence for disposition effect: a systematic review

Qualitative Research in Financial Markets ◽

10.1108/qrfm-07-2018-0081 ◽

2019 ◽

Vol 11 (1) ◽

pp. 2-21 ◽

Cited By ~ 1

Author(s):

Syed Aliya Zahera ◽

Rohit Bansal

Keyword(s):

Mutual Funds ◽

Behavioral Finance ◽

Mutual Fund ◽

Institutional Investors ◽

Disposition Effect ◽

Individual Investors ◽

Content Type ◽

Experimental Market ◽

The Individual ◽

The Impact

Purpose The purpose of this paper is to study the disposition effect that is exhibited by the investors through the review of research articles in the area of behavioral finance. When the investors are hesitant to realize the losses and quick to realize the gains, this phenomenon is known as the disposition effect. This paper explains various theories, which have been evolved over the years that has explained the phenomenon of disposition effect. It includes the behavior of individual investors, institutional investors and mutual fund managers. Design/methodology/approach The authors have used the existing literatures from the various authors, who have studied the disposition effect in either real market or the experimental market. This paper includes literature over a period of 40 years, that is, Dyl, 1977, in the form of tax loss selling, to the most recent paper, Surya et al. (2017). Some authors have used the PGR-PLR ratio for calculating the disposition effect in their study. However, some authors have used t-test, ANNOVA, Correlation coefficient, Standard deviation, Regression, etc., as a tool to find the presence of disposition effect. Findings The effect of disposition can be changed for different types of individual investors, institutional investors and mutual funds. The individual investors are largely prone to the disposition effect and the demographic variables like age, gender, experience, investor sophistication also impact the occurrence of the disposition effect. On the other side, the institutional investors and mutual funds managers may or may not be affected by the disposition effect. Practical implications The skilled understanding of the disposition effect will help the investors, financial institutions and policy-makers to reduce the adverse effect of this bias in the stock market. This paper contributes a detailed explanation of disposition effect and its impacts on the investors. The study of disposition effect has been found to be insufficient in the context of Indian capital market. Social implications The investors and society at large can gains insights about causes and influences of disposition effect which will be helpful to create sound investment decisions. Originality/value This paper has complied the 11 causes for the occurrence of disposition effect that are found by the different authors. The paper also highlights the impact of the disposition effect in the decision-making of various investors.

Download Full-text

Returns to buying upward revision and selling downward revision stocks

Managerial Finance ◽

10.1108/mf-10-2015-0282 ◽

2016 ◽

Vol 42 (11) ◽

pp. 1110-1124

Author(s):

Tony Chieh-Tse Hou ◽

Phillip McKnight ◽

Charlie Weir

Keyword(s):

Stock Returns ◽

Stock Prices ◽

Information Diffusion ◽

Trading Strategy ◽

Good News ◽

Analyst Forecast ◽

Earnings Forecast ◽

Content Type ◽

Forecast Revisions ◽

New Information

Purpose The purpose of this paper is to investigate the role of earnings forecast revisions by equity analysts in predicting Canadian stock returns Design/methodology/approach The sample covers 420 Canadian firms over the period 1998-2009. It analyses investors’ reactions to 27,271 upward revisions and 32,005 downward revisions of analysts’ forecasts for Canadian quoted companies. To test whether analysts’ earnings forecast revisions affect stock return continuation, forecast revision portfolios similar to Jegadeesh and Titman (2001) are constructed. The paper analyses the returns gained from a trading strategy based on buying the strong upward revisions portfolio and short selling the strong downward revisions portfolio. It also separates the sample into upward and downward revisions. Findings The authors find that new information in the form of analyst forecast revisions is not impounded efficiently into stock prices. Significant returns persist for a trading strategy that buys stocks with recent upward revisions and short sells stocks with recent downward revisions. Good news is impounded into stock prices more slowly than bad news. Post-earnings forecast revisions drift is negatively related to analyst coverage. The effect is strongest for stocks with greatest number of upward revisions. The introduction of the better disclosure standards has made the Canadian stock market more efficient. Originality/value The paper adds to the limited evidence on the effect of analyst forecast revisions on the returns of Canadian stocks. It sheds light on the importance of analysts’ earnings forecast information and offers support for the investor conservatism and information diffusion hypotheses. It also shows how policy can improve market efficiency.

Download Full-text

Fund managers’ herding and mutual fund governance

International Journal of Managerial Finance ◽

10.1108/ijmf-12-2014-0197 ◽

2016 ◽

Vol 12 (3) ◽

pp. 242-276 ◽

Cited By ~ 3

Author(s):

Lorenzo Casavecchia

Keyword(s):

Mutual Fund ◽

Critical Role ◽

Capital Allocation ◽

Content Type ◽

Multivariate Tests ◽

Managerial Skills ◽

Fund Managers ◽

Herding Strategies ◽

Trading Decisions ◽

Fund Governance

Purpose – The purpose of this paper is to identify the implications of managerial herding for investors’ wealth and capital allocation across funds, and the critical role played by fund governance in monitoring herding incentives. Design/methodology/approach – The author adopt the fund herding measure first proposed by Grinblatt et al. (1995) over the long sample period 1992-2007. Univariate and multivariate tests are then constructed to examine the relationship between managerial herding, performance, and investors’ sensitivities. OLS, fixed-effect panel data models are utilized to conduct the tests. Findings – The author show that managers that do not herd have above-average managerial skills, trade less on noise, and significantly outperform herding managers. The author also illustrate that although fund herding could be used as a signal of managerial quality, underperforming herding funds manage to survive in equilibrium, indicating that investor flows do not adequately respond to the information content of a persistent herding behavior. Finally, the author demonstrate that better governance in the form of stronger managerial incentive schemes constitutes a significant deterrent against detrimental herding strategies, representing an effective monitoring device of the response of fund managers to poor flow-performance sensitivity. Originality/value – The paper provides original evidence on the efficacy of external and internal governance in deterring wealth-reducing herding strategies. The author document that where more effective managerial incentives schemes are put in place by the management companies, fund managers are more likely to be better informed, resulting in fewer incentives to mimic the trading decisions of their peers.

Download Full-text

Earnings forecast revisions and securities prices evolution in the Tunisian stock market

Review of Behavioral Finance ◽

10.1108/rbf-03-2018-0025 ◽

2019 ◽

Vol 11 (2) ◽

pp. 165-187

Author(s):

Ahmed Bouteska ◽

Boutheina Regaieg

Keyword(s):

Stock Market ◽

Stock Prices ◽

Earnings Forecast ◽

Behavioral Models ◽

Content Type ◽

Forecast Revisions ◽

Theoretical Hypothesis ◽

Investor Reaction ◽

Psychological Bias ◽

Abnormal Variation

Purpose The purpose of this paper is to investigate the effect of forecast earnings’ revision on the evolution of securities prices in the Tunisian stock market. Design/methodology/approach A portfolio study of investor reaction and stock prices following revisions is first conducted to highlight the existence of abnormal return related to analysts’ earnings revisions. Analysis is then supplemented by a second empirical investigation based on the panel data to quantify the effect of revision on the abnormal profitability of securities. Findings The evidence found in this paper validates the fundamental theoretical hypothesis according to which the psychological bias resulting from the effect of the forecast earnings revision is related to the abnormal profitability of the securities. The authors conclude the importance of the revision impact on investors’ behavior on one hand, and the informational content of the analysts’ forecasts and the biases which they lead on the other hand. Originality/value Globally, the empirical illustrations largely validate the findings of behavioral models particularly that of Kormendi and Lippe (1987), Cornell and Letsman (1989), Beaver et al. (2008) which states that investors under psychological bias, react to the effect of forecast earnings revision by an abnormal variation in stock prices.

Download Full-text

Water-related mutual funds: investment performance and social role

Social Responsibility Journal ◽

10.1108/srj-08-2013-0104 ◽

2015 ◽

Vol 11 (3) ◽

pp. 502-512 ◽

Cited By ~ 10

Author(s):

Marta Alvarez ◽

Javier Rodríguez

Keyword(s):

Mutual Funds ◽

Mutual Fund ◽

Social Role ◽

Individual Investors ◽

Socially Responsible ◽

Investment Performance ◽

Content Type ◽

Value Of Water ◽

Socially Responsible Mutual Funds ◽

Open Question

Purpose – The purpose of this paper is to examine the performance and diversification value of water-related funds. As pollution, climate change and accelerated population growth threaten water resources worldwide, such resources have become a sought-after asset. For most investors, it is impractical to physically hold water as part of a portfolio; therefore, an open question is how to better gain exposure to this asset. The authors propose a look at water-related mutual funds, an issue not found addressed in the literature. In addition to the investment potential of these funds, investors might be drawn to them as part of a more comprehensive socially responsible agenda. Design/methodology/approach – In the present study, the authors identify and measure the risk-adjusted performance and diversification value of open-end funds dedicated to investments in water-related securities. Jensen’s alpha is used to measure risk-adjusted performance, whereas diversification value is examined by implementing a methodology widely used in the mutual fund literature. Findings – Consistent with previous studies on the performance of ethical or socially responsible mutual funds, the authors found that their sample of water-related mutual funds neither outperform nor underperform two benchmarks. However, the authors also found that they offer potential diversification gains for international mutual funds’ portfolios. Research limitations/implications – Open-end water-related mutual funds have only been recently created, and currently, very few funds are available to investors. These facts limit the sample size and the length of the return series examined. Originality/value – The authors have not found a paper that examines the performance and diversification value of water-related mutual funds. These funds present themselves as a practical way for individual investors to gain exposure to the commodity of water.

Download Full-text

Stock price crash risk and unexpected earnings thresholds

Managerial Finance ◽

10.1108/mf-08-2017-0312 ◽

2018 ◽

Vol 44 (8) ◽

pp. 1012-1030 ◽

Cited By ~ 1

Author(s):

Wing Him Yeung ◽

Camillo Lento

Keyword(s):

Stock Price ◽

Design Methodology ◽

Crash Risk ◽

Earnings Forecast ◽

Content Type ◽

Critical Thresholds ◽

Unexpected Earnings ◽

New Evidence ◽

Earnings Thresholds ◽

Earnings Change

Purpose The purpose of this paper is to examine stock price crash risk (SPCR) as a function of meeting or missing three earnings thresholds – reporting a profit (earnings level), reporting an earnings increase (earnings change) and meeting analysts’ forecasts (earnings expectation). Design/methodology/approach The authors rely upon the research design of Herrmann et al. (2011) to identify the incremental impact of the earnings level and earnings change benchmarks on SPCR, after controlling for the effects of meeting or missing analysts’ expectations. Findings The authors find that meeting analysts’ expectations is negatively associated with SPCR, and this relationship strengthens with the magnitude of the unexpected earnings. However, the authors find little evidence of incremental threshold effects to suggest that earnings level and earnings change benchmarks are critical thresholds with respect to SPCR. Our results are robust after including a number of control variables. Originality/value This study contributes to the literature that investigates determinants of SPCR while simultaneously providing new evidence to conclusions that analysts’ earnings forecast is at the top of the earnings benchmark hierarchy.

Download Full-text