Are smart beta funds really smart? Evidence from rational and quasi-rational investor sentiment data

2019 ◽  
Vol 12 (2) ◽  
pp. 97-118
Author(s):  
Rahul Verma ◽  
Gökçe Soydemir ◽  
Tzu-Man Huang
Keyword(s):  
Institutional Investors ◽  
Institutional Investor ◽  
Individual Investors ◽  
Leading Indicators ◽  
Individual Investor ◽  
Short Term ◽  
Content Type ◽  
Economic Fundamentals ◽  
Investor Sentiments ◽  
Smart Beta

Purpose The purpose of this paper is to examine the relative effects of rational and quasi-rational sentiments of individual and institutional investors on a set of smart beta fund returns. The magnitudes of the impacts of institutional investor sentiments are greater than those of individual investor sentiments. In addition, both rational and quasi-rational sentiments of individual and institutional investors have significant impacts on smart beta fund returns. The magnitudes of the impacts of quasi-rational sentiments are greater than those of the rational sentiments for both types of investors (quasi-rational sentiments of institutional investors have the maximum impact). These results are consistent with the arguments that professional investors consider the sentiments of individual investors as contrarian leading indicators which are mainly driven by noise while conform the sentiments of institutional investors which are driven by more rational factors. A majority of smart beta funds in the sample outperform the S&P500 returns in the short term but fail to consistently beat the market. The authors find evidence that smart beta funds with consistently high returns are relatively less (more) driven by individual (institutional) investor sentiments. Overall, the authors argue that smart beta funds appear to follow quasi-rational sentiments of both individual and institutional investors that are not rooted in economic fundamentals. Design/methodology/approach The results of the impulse functions generated from a multivariate model suggest that the smart beta fund returns are negatively (positively) impacted by individual (institutional) investor sentiments. Findings The magnitudes of the impacts of institutional investor sentiments are greater than those of individual investor sentiments. In addition, both rational and quasi-rational sentiments of individual and institutional investors have significant impacts on smart beta fund returns. The magnitudes of the impacts of quasi-rational sentiments are greater than those of the rational sentiments for both types of investors (quasi-rational sentiments of institutional investors have the maximum impact). Originality/value These results are consistent with the arguments that professional investors consider the sentiments of individual investors as contrarian leading indicators which are mainly driven by noise while conform the sentiments of institutional investors which are driven by more rational factors. A majority of smart beta funds in the sample outperform the S&P500 returns in the short term but fail to consistently beat the market. The authors find evidence that smart beta funds with consistently high returns are relatively less (more) driven by individual (institutional) investor sentiments. Overall, the authors argue that smart beta funds appear to follow quasi-rational sentiments of both individual and institutional investors that are not rooted in economic fundamentals.

Categorizing sentiment and its impact on REIT returns

2015 ◽  
Vol 41 (9) ◽  
pp. 958-973 ◽  
Author(s):  
Daniel Huerta ◽  
Dave O. Jackson ◽  
Thanh Ngo
Keyword(s):  
Investor Sentiment ◽  
Institutional Investor ◽  
Individual Investors ◽  
Individual Investor ◽  
Content Type ◽  
Portfolio Rebalancing ◽  
Multiple Sample ◽  
Security Pricing ◽  
And Performance ◽  
The Impact

Purpose – The purpose of this paper is to reexamine the impact of investor sentiment on real estate investment trust (REIT) returns using direct, survey-based measures of sentiment to categorize sentiment from institutional and individual investors. Design/methodology/approach – The authors provide a framework in which sentiment is classified into individual and institutional investor sentiment under the assumption that investors, depending on sophistication, react differently to the same set of information and will influence REIT prices differently. The authors employ a methodology that uses panel regression analyses and divides the sample of REITs into size and performance portfolios. Findings – The regression results suggest that institutional investor sentiment is positively and significantly related to REIT returns contemporaneously for multiple sample specifications. These results are consistent with high levels of institutional ownership in REITs. Results also suggest that individual investor sentiment only influences small capitalization and low-α portfolios. Originality/value – The findings provide more evidence on the influence of investor sentiment on security pricing even for highly regulated sectors such as the REIT industry. Investors may use changes in sentiment as signals for portfolio rebalancing and capital allocations.

Investor sentiments and pricing errors

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Rahul Verma ◽  
Priti Verma
Keyword(s):  
Risk Factors ◽  
Institutional Investors ◽  
Stock Prices ◽  
Institutional Investor ◽  
Content Type ◽  
Valuation Model ◽  
Intrinsic Values ◽  
Pricing Errors ◽  
Investor Sentiments ◽  
The Impact

PurposeThis paper computes the pricing errors of S&P 500 index by employing the valuation model developed by Doran et al. (2009) and investigates its response to individual and institutional investor sentiments. This study contributes to the literature by looking at both rational and quasi-rational sentiments and how noise trading and investments based on fundamentals affect pricing errors.Design/methodology/approachThis paper computes the pricing errors of S&P 500 index by employing the valuation model developed by Doran et al. (2009) and investigates its response to individual and institutional investor sentiments.FindingsResults show that pricing errors are persistent and stock prices systematically deviate from their intrinsic values. The authors also find that both individuals and institutional investors form their expectations based on risk factors as well as noise; however, institutional investors seems to be more driven by rational factors. The findings also suggest that institutional investors have a significant power to cause pricing errors due to unpredictable changes in their sentiments while small investors lack such ability to move stock prices away from their intrinsic values. Additionally, this paper finds that quasi-rational (rational) investor sentiments have positive (negative) impact on pricing errors suggesting that trading based on noise is an important determinant of pricing errors while investors' expectations stemming from fundamentals play an important role in improving market efficiency.Research limitations/implicationsThe impact of rational outlook due to changes in fundamentals seems to be greater than that of noise on the pricing errors, consistent with both risk-based and behavioral models of the asset pricing literature.Originality/valueOur study contributes to the existing literature in the following ways: first, the authors employ most recent data to compute mispricing for the market index and investigate if it is persistent and systematic. Second, the authors decompose sentiment variables into rational and quasi-rational components and trace their dynamics to better understand the role of risk factors and noise in the formation of sentiments. Third, the authors investigate the relative impact of individual and institutional investor sentiments on mispricing. Lastly, the authors examine the response of pricing errors to both rational and quasi-rational sentiments of individual and institutional investors.

Do IPO filing prices reflect firm quality?

2019 ◽  
Vol 45 (4) ◽  
pp. 499-512
Author(s):  
Jaclyn J. Beierlein ◽  
James Nelson
Keyword(s):  
Institutional Investors ◽  
Design Methodology ◽  
Institutional Investor ◽  
Ordinary Least Squares ◽  
Individual Investors ◽  
Firm Characteristics ◽  
Ceteris Paribus ◽  
Content Type ◽  
Underwriter Reputation ◽  
Practical Implications

Purpose Prior research suggests that institutional investors prefer higher priced stock, while individual investors prefer lower priced stock. The purpose of this paper is to examine whether the IPO filing price reflects firm characteristics that are commonly associated with quality, including size, age, earnings, underwriter reputation and venture capital backing. Design/methodology/approach The authors used t-tests, Wilcoxon rank sum tests, logistic and ordinary least squares regressions to test the hypotheses. Findings The authors find that IPO filing prices are positively related to measures of quality, except venture backing, which impacts prices non-linearly. Ceteris paribus, small (large) venture backed firms’ filing prices are set significantly lower (higher). Research limitations/implications Firm managers set IPO filing prices high when they believe the firm is likely to attract institutional investors due to its size, quality and certification, and will set prices low otherwise. Practical implications Individual investors should be wary of IPO firms with lower prices. Managers should be cognizant of the positive relationship between IPO quality and price. Originality/value This study provides evidence that IPO prices reflect firm quality and may be set deliberately to attract individual investors when institutional investor demand is expected to be low. It also provides evidence that venture backing affects IPO prices non-linearly, consistent with the grandstanding hypothesis.

Information search in times of market uncertainty: an examination of aggregate and disaggregate uncertainty

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Marshall A. Geiger ◽  
Rajib Hasan ◽  
Abdullah Kumas ◽  
Joyce van der Laan Smith
Keyword(s):  
Information Search ◽  
Institutional Investors ◽  
Volume Index ◽  
Individual Investor ◽  
Market Uncertainty ◽  
Data Set ◽  
Current Time ◽  
Content Type ◽  
Information Demand ◽  
Google Search

PurposeThis study explores the association between individual investor information demand and two measures of market uncertainty – aggregate market uncertainty and disaggregate industry-specific market uncertainty. It extends the literature by being the first to empirically examine investor information demand and disaggregate market uncertainty.Design/methodology/approachThis paper constructs a measure of information search by using the Google Search Volume Index and computes measures of aggregate and disaggregate market uncertainty using institutional investors' trading data from Ancerno Ltd. The relation between market uncertainty, as measured by trading disagreements among institutional investors, and information search is analyzed using an OLS (Ordinary Least Squares) regression model.FindingsThis paper finds that individual investor information demand is significantly and positively correlated with aggregate market uncertainty but not associated with disaggregated industry uncertainty. The findings suggest that individual investors may not fully incorporate all relevant uncertainty information and that ambiguity-related market pricing anomalies may be more associated with disaggregate market uncertainty.Research limitations/implicationsThis study presents an examination of aggregate and disaggregate measures of market uncertainty and individual investor demand for information, shedding light on the efficiency of the market in incorporating information. A limitation of our study is that our data for market uncertainty is based on investor trading disagreement from Ancerno, Ltd. which is only available till 2011. However, we believe the implications are generalizable to the current time period.Practical implicationsThis study provides the first concurrent empirical assessment of investor information search and aggregate and disaggregate market uncertainty. Prior research has separately examined information demand in these two types of market uncertainty. Thus, this study provides information to investors regarding the importance of assessing disaggregate component measures of the market.Originality/valueThis paper is the first to empirically examine investor information search and disaggregate market uncertainty. It also employs a unique data set and method to determine disaggregate, and aggregate, market uncertainty.

Investigating association between factors fostering attention to a stock and rationales to buy it: an empirical analysis

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ripsy Bondia ◽  
Pratap C. Biswal ◽  
Abinash Panda
Keyword(s):  
Decision Making ◽  
Categorical Data ◽  
Categorical Variables ◽  
Individual Investors ◽  
Multiple Response ◽  
Individual Investor ◽  
Test Statistic ◽  
Chi Square ◽  
Content Type ◽  
First Order

PurposeCan something that drives our initial attention toward a stock have any implications on final decision to buy it? This paper empirically and statistically tests association, if any, between factors fostering attention toward a stock and rationales to buy it.Design/methodology/approachThis paper uses survey responses of individual investors involving multiple response categorical data. Association between attention fostering factors and rationales is tested using a modified first-order corrected Rao-Scott chi-square test statistic (to adjust for within-participant dependence among responses in case of multiple response categorical variables). Further, odds ratios and mosaic plots are used to determine the effect size of association.FindingsStrong association is seen between attention fostering factors and rationales to buy a stock. Further, strongest associations are seen in cases where origin is the same underlying influencing factor. Some of the most cited attention fostering factors and rationales in this research stem from familiarity bias and expert bias.Practical implicationsWhat starts as a trivial attention fostering factor, which may not even be recognized by majority investors, can go on to become one of the rationales for buying a stock. This can result in substantial financial implications for an individual investor. Investor education agencies and regulatory authorities can make investors cognizant of such association, which can help investors to improve and adjust their decision making accordingly.Originality/valueThe extant literature discusses factors/biases influencing buying decisions of individual investors. This research takes a step ahead by distinguishing these factors in terms of whether they play role of (1) fostering attention toward a stock or (2) of reasons for ultimately buying it. Such dissection of factors/biases, to the best of authors' knowledge, has not been done previously in any empirical and statistical analysis. The paper uses multiple response categorical data and applies a modified first-order corrected Rao-Scott chi-square statistic to test association. Application of the above-mentioned test statistic has not been done previously in context of individual investor decision-making.

Does salience matter in investment decision?

Kybernetes ◽  
2019 ◽  
Vol 48 (8) ◽  
pp. 1894-1912
Author(s):  
Samra Chaudary
Keyword(s):  
Investment Decision ◽  
Investment Decisions ◽  
Equation Modeling ◽  
Individual Investors ◽  
Short Term ◽  
Content Type ◽  
Multigroup Analysis ◽  
Money Managers ◽  
The Impact

Purpose The paper takes a behavioral approach by making use of the prospect theory to unveil the impact of salience on short-term and long-term investment decisions. This paper aims to investigate the group differences for two types of investors’ groups, i.e. individual investors and professional investors. Design/methodology/approach The study uses partial least square-based structural equation modeling technique, measurement invariance test and multigroup analysis test on a unique data set of 277 active equity traders which included professional money managers and individual investors. Findings Results showed that salience has a significant positive impact on both short-term and long-term investment decisions. The impact was almost 1.5 times higher for long-term investment decision as compared to short-term decision. Furthermore, multigroup analysis revealed that the two groups (individual investors and professional investors) were statistically significantly different from each other. Research limitations/implications The study has implications for financial regulators, money managers and individual investors as it was found that individual investors suffer more with salience heuristic and may end up with sub-optimal portfolios due to inefficient diversification. Thus, investors should be cautious in fully relying on salience and avoid such bias to improve investment returns. Practical implications The study concludes with a discussion of policy and regulatory implications on how to minimize salience bias to achieve optimum and diversified portfolios. Originality/value The study has significantly contributed to the growing body of applied behavioral research in the discipline of finance.

Is institutional investor a supervisor or cooperator?

2018 ◽  
Vol 9 (1) ◽  
pp. 2-18 ◽  
Author(s):  
Yuedong Li ◽  
Xianbing Liu ◽  
Qing Yan
Keyword(s):  
Institutional Investors ◽  
Institutional Investor ◽  
Test Methods ◽  
Future Research ◽  
Management Turnover ◽  
Content Type ◽  
Financial Restatement ◽  
Strategic Cooperation ◽  
Financial Restatements ◽  
The Relationship

Purpose The purpose of this paper is to discuss whether top management will assume their liabilities especially when financial restatement occurs, and,based on the “effective supervision theory” and “strategic cooperation theory,” to examine whether an institutional investor is a supervisor or a cooperator considering the management turnover caused by financial restatement in the companies. Design/methodology/approach Using a sample of the A-share-listed companies from year 2010 to year 2014 and dividing financial restatement into fraudulent financial restatement and other financial restatement, the authors examine the relationship between financial restatement and abnormal management turnover, which usually is related to the management integrity or capacity. By using group test methods, the authors test the influence of the institutional investors’ shareholding on the relation between financial restatements and management turnover. Findings This paper finds that financial restatement can result in abnormal management turnover, especially the fraudulent financial restatement. The institutional investors usually are supervisors but when the shareholding of institutional investor is too high and the management turnover results from fraudulent financial restatement, the institutional investors may become cooperators with management in the companies. Besides, the institutional investors play the supervisory function more significantly in non-state-owned enterprises. Originality/value This paper expands literature of the institutional investors in the corporate governance area and provides a basis for future research in the area of the institutional investors’ governance effect. It divides financial restatements into fraudulent financial restatement and other financial restatement and examines the relationship between financial restatement and abnormal management turnover so as to provide evidence about whether the management will assume their responsibilities when there is financial restatement in the company. It also tests whether the institutional investors will play supervisor’s or cooperator’s function in state-owned and non-state-owned enterprises.

A study of prominence for disposition effect: a systematic review

2019 ◽  
Vol 11 (1) ◽  
pp. 2-21 ◽  
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.

Compensation-related institutional investor activism – a literature review and integrated analysis of sustainability aspects

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Patrick Velte ◽  
Jörn Obermann
Keyword(s):  
Literature Review ◽  
Institutional Investors ◽  
Institutional Investor ◽  
Future Research ◽  
Integrated Analysis ◽  
Principal Agent ◽  
Management Compensation ◽  
Principal Agent Theory ◽  
Content Type ◽  
Agent Theory

Purpose This paper aims to analyse whether and how different types of institutional investors influence shareholder proposal initiations, say-on-pay (SOP) votes and management compensation from a sustainability perspective. Design/methodology/approach Based on the principal-agent theory, the authors conduct a structured literature review and evaluate 40 empirical-quantitative studies on that topic. Findings The traditional assumption of homogeneity within institutional investors, which is in line with the principal–agent theory, has to be questioned. Only special types of investors (e.g. with long-term and non-financial orientations and active institutions) run an intensive monitoring strategy, and thus initiate shareholder proposals, discipline managers by higher SOP dissents and prevent excessive management compensation. Research limitations/implications A detailed analysis of institutional investor types is needed in future empirical analyses. In view of the current debate on climate change policy, future research could analyse in more detail the impact of institutional investor types on proxy voting, SOP and (sustainable) management compensation. Practical implications With regard to the increased shareholder activism and regulations on SOP and management compensation since the 2007/2008 financial crisis, firms should be aware of the monitoring role of institutional investors and should analyse their specific ownership nature (time- and content-driven and as well as range of activity). Originality/value To the best of authors’ knowledge, this is the first literature review with a clear focus on institutional investor range and nature, shareholder proposal initiation, SOP and management compensation (reporting) from a sustainability viewpoint. The authors explain the main variables that have been included in research, stress the limitations of this work and offer useful recommendations for future research studies.

Behavioral biases on institutional investors: a literature review

Kybernetes ◽  
2016 ◽  
Vol 45 (10) ◽  
pp. 1668-1684 ◽  
Author(s):  
Selim Aren ◽  
Sibel Dinç Aydemir ◽  
Yasin Şehitoğlu
Keyword(s):  
Literature Review ◽  
Empirical Evidence ◽  
Institutional Investors ◽  
Design Methodology ◽  
Home Bias ◽  
Institutional Investor ◽  
Disposition Effect ◽  
Herding Behavior ◽  
Content Type ◽  
Behavioral Biases

Purpose The purpose of this paper is to evaluate published institutional investor research focused on home bias, disposition effect, and herding behavior in recognized journals and to ascertain some substantial gaps with regard to them. Design/methodology/approach Recently published studies between 2005 and 2014, which intend to examine behavioral biases on institutional investors, have been reviewed through juxtaposing them under the three fundamental titles and figuring them according to the explanation why these biases occurs. Findings The research examining home bias has identified the presence of this effect on institutional investors and explained it with information or culture. Yet, the existence of disposition effect has not been found in the extant research. These studies have estimated disposition effect through overconfidence and experience. Also, extant studies have provided evidence of herding behavior, attributing this behavior to pursuing same published information and protecting their reputation and career. Originality/value Currently, no study, which reviews and evaluates the empirical research body on behavioral biases displayed institutional investors, exists. To the authors’ knowledge, this is the first paper which highlights the empirical evidence on these bias and summarizes the explanations in these studies for these biases exhibited by institutional investors. This could contribute to the researchers focusing on behavioral biases on institutional investors by providing them with a meaningful figuralization regarding their evidence and explanation.

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