Perspective Of Behavioral Finance Research Articles

Investor behavior, information disclosure strategy and counterparty credit risk contagion

Counterparty credit risk caused by the excessive expansion of credit derivatives is becoming more and more prominent. The study of evolution mechanism of its contagion will help the financial regulators set up a scientific and accessible prevention and control strategy. From the cross perspective of behavioral finance and information economics, this study analyzes the mechanism of counterparty credit risk contagion. Based on the epidemic model, a network model of it is built with the consideration of investor behavior and information disclosure strategy. The network topology characteristics of it are analyzed in theory. Meanwhile, this study analyzes the evolution characteristics of it in numerical simulation. The main conclusions are as follows: First, investor behavior or information disclosure strategy only affects counterparty credit risk contagion in local credit asset network, while it is gradually disappearing in global credit asset network. Second, noise can enhance the impact intensity of investor behavior or information disclosure strategy on counterparty credit risk contagion, and lead to the spread of counterparty credit risk synchronously in local and global credit asset networks. Third, information transmission rate has “local strengthening effect” on investor behavior. The timing of information release and the tendency of information disclosure exert a “global suppression effect” on the influence of investors, and the ability of investor information decision-making has a “local suppression effect” on the timing of information release and the tendency of information disclosure. Through the comprehensive adjustment of investor behavior and information disclosure strategy, the goal of preventing and controlling counterparty credit risk contagion can be realized in local and global credit asset networks.

An equilibrium model of the supply chain network under multi-attribute behaviors analysis

This paper studies a supply chain network (SCN) equilibrium model considering decision makers’ multi-attribute behaviors from the perspective of behavioral finance. In this paper, an equilibrium model of an uncertain SNC is constructed, in which retailers choose their decisions according to their risk-averse behavior, loss-averse behavior, and regret-averse behavior. By using different weights to represent retailers’ attitudes to these three behaviors, the retailers’ multi-attribute utility functions are developed. The equilibrium conditions of the manufacturers, the retailers, together with the network are established by the finite-dimensional variational inequality formulation. Three numerical examples are solved. In the first numerical example, we illustrate the effect of each of these three behaviors on the equilibrium decisions, the profits, and the utilities of the decision makers. In the other two numerical examples, we explore the effects of changes in attitudes to these three behaviors on the equilibrium decisions, profits, and utilities of the decision makers. The numerical results show that the equilibrium decisions are affected by each of these three behaviors very much. Moreover, they are sensitive to the changes in attitudes to these behaviors.

R&D value of Chinese manufacturing listed companies

PurposeThe way to measure the value of an enterprise’s R&D investments remains elusive for theoretical and empirical study on innovation economics. The paper aims to discuss this issue.Design/methodology/approachThis paper expands the asset-value model pioneered by Griliches (1981) and applies it for the first time to the Chinese stock market to calculate the value of R&D investment instilled by Chinese manufacturing listed companies (CMLCs) from 2003 to 2014.FindingsThe authors find that: the assets-value model can better explain the enterprise value composition of CMLCs; with equal input, the value of R&D is higher than that of tangible assets, and lower than that of organizational assets; compared with the developed countries, the R&D value of CMLCs is lower; and the R&D value of CMLCs saw a downward trend from 2007 to 2014.Originality/valueFurthermore, by rationally estimating the value of organizational assets and non-tradable shares, and innovatively introducing semi-annual momentum indicators from the perspective of behavioral finance to control the influence of investor sentiment on enterprise value, this paper tries to develop the asset-value model and provides a feasible solution to the problem of measuring the value of Chinese enterprises’ R&D investment.

Executive Equity Incentives, Overconfidence and Corporate Inefficient Investment

In the past research on equity incentives, the influence of incentive system on individual psychological factors was often neglected. From the perspective of behavioral company finance, this paper takes executives from 2010 to 2016 China A-share listed companies as research samples to research framework for overconfidence, executive equity incentives, and corporate inefficient in-vestment. The results of the study show that equity incentives can alleviate the underinvestment behavior of executives by influencing executives’ over-confidence, and executive overconfidence is partly a sub-mediating effect. However, for over-invested enterprises, the indirect effect of executive over-confidence generated by equity incentives on corporate over-investment is a deterioration, and the direct effect of equity incentives is opposite to the indirect effect. So executives’ overconfidence in equity incentives, in the ex-cessive investment of enterprises, plays a special mediating effect—the cover effect.

Public Opinions Impacts on Cryptocurrency Valuation: A View from Behavioral Finance Perspective

Many fintech start-ups participant companies and cryptocurrencies have experienced phenomenal growth in value during the past several years. Many specialists would like to know the reasons for such success. In this article we investigate the predictive power of public opinions. This is one of the few works that using quantitative analysis connects social media and internet users' activities with cryptocurrency valuations.

Research on the Relationship between CEO's Overconfidence and Corporate Investment Financing Behavior

At present, the classic corporate finance theory is challenged by various behavioral visions of corporate leaders in the actual decision-making of corporate finance. From the perspective of behavioral finance, this paper selects the data of A-share listed companies in China's Shanghai Stock Exchange and Shenzhen Stock Exchange in 2003-2016 to study the relationship between CEO's overconfidence and business operations. The study found that: Overconfidence CEOs will tend to increase the level of leverage, increase the number of loans, especially to increase the number of short-term loans; When the economic growth is faster, the listed company's CEO is more inclined to overconfidence; However, unlike the results of foreign studies, overconfident companies did not replace CEOs more frequently than non-overconfident companies, and did not increase the probability of bankruptcy. Finally, the CEO of a state-owned company does not appear to be more overconfident than the CEO of a private company.

Application of situational stimuli for examining the effectiveness of financial education: A behavioral finance perspective

The lack of financial education is often considered the reason for poor financial decision making abilities within the population. Many believe that this could be the consequence of lower rates of financial literacy among Americans. However, as financial education programs continue to become more pervasive, other scholars have argued that financial education may not be very effective in improving peoples’ financial decision making abilities. This study examines the role of situational stimuli on the delivery of financial education on investment related topics. The sample is comprised of college students who were randomly assigned to treatment and control groups for the empirical analyses of this study. Results from the experimental application of the three types of treatments when delivering investment related financial education, are presented. The findings indicate that investment-related financial education improves investment knowledge. Additionally, situational and conditional stimuli related to market uncertainty and volatility, and peer effects do not hinder this information processing and knowledge learning process. Findings shed light on the design and evaluation of national financial education programs for financial educators and policymakers.

Analysis of Merger and Acquisition in Pakistan

We examine the financial performance of firms in the post-Merger and acquisition period for firms listed on the Karachi Stock Exchange by exploring various motives of merger and acquisitions offered by theoretical and empirical literature. Specifically, we explore these motives in the context of the theory of synergy, agency theory and behavioral finance perspectives. Empirical results for agency theory shows the presence of empire building motives that lead to the underperformance of firms in post-merger and acquisition period. The study finds no support for managerial risk aversion hypothesis of agency theory in Pakistani market. Empirical results do not find any evidence to support the presence of managerial hubris or overconfidence proposition but we do find evidence in support of the escalation of commitment hypotheses and its impact on post-merger and acquisition performance.

Behavior of fund managers in Malaysian investment management industry

PurposeThis paper aims to explore the relevance of bounded rationality to the practice of institutional investors in Malaysia. Understanding institutional investor behavior is important, as it can determine the asset prices and consequently the market behavior.Design/methodology/approachA set of questionnaires is used to solicit information regarding the understanding and practical application of behavioral finance theories and strategies among fund managers in the Malaysian investment management practice. In the process, bounded rational theory is aimed to be validated. Fund managers’ possible bounded rational behavior is assessed with reference to their investment management approaches and strategies right from individual beliefs and acquisition of information, as well as investment management and strategies used.FindingsThe findings lend support to the notion that institutional investors too, being normal human beings, are expected to think and behave in a boundedly rational manner as postulated in bounded rational theory. The sources of bounded rationality are individual, institutional and social forces. Thus, portfolio trading and investment management strategies are exposed to wide varieties of behavioral risks. Despite the notions that behavioral risks are real and the impact on fund performance could be pervasive, fund managers’ self-awareness regarding control and institutional readiness to govern behavioral risks in investment practices is still low.Research limitations/implicationsEmpirical evidence drawn in the current paper is subjected to small sample size and specific focus on Malaysian context. Despite this limitation, the sample is statistically sufficient and provides a fair representation, as well as quality opinions, of fund manager’s investment management behavior in Malaysia. This research provides valuable implications to practitioners (fund managers) and regulators (investment management and capital market policymakers). In practice, the current study draws some practical ideas, especially for buy-side institutional investors, on the source and impact of behavioral biases on fund management practices and performance. For regulators, this research highlighted the needs and possible ways to regulate these behavioral risks.Originality/valueThe current paper provides new insights on the theory and practice of the institutional investor. In theory, this research provides evidence of bounded rationality of institutional investor behavior, practicing in the asset management industry in the emerging markets of Malaysia. This evidence lends support to the validity of the bounded rationality theory in explaining institutional investor behavior. In practice, thisresearch provides new insights on the relevance of behavioral finance perspectives and strategies in the asset management industry practice and policy.

Typology of corporate liquidity managers from behavioral finance perspective

The paper presents a typology of professionals who deal with liquidity management in enterprises and is based on meta analysis of the results of the qualitative research led by the author. This typology reflects managers‟ susceptibility to selected decision traps and their reflection about non-economic determinants that may influence decision-making process.

Herd Behaviour: How Decisive is the Noise in the NSE and BSE Stock Markets?

Do investors in the stock markets act/react on true information or noise? Do they believe on their own information or simply herd? The study seeks to explore these typical research queries from the behavioral finance perspectives. In particular, it develops a new theory of herding behavior and extends the models of Banerjee (1992) and Bikhchandani, Hirshleifer, and Welch (1992). The study also empirically tests the same on the Indian context with the high frequency intraday trading data for the real trade-time or time-stamp, trade-volume, and trade-price of ten sample scripts listed for their trading in both markets - the Bombay Stock Exchange (BSE) and the National stock Exchange (NSE). The study contributes to the literature with original findings. It shows that investors in the two Indian stock markets show crowd of positive and negative herding as well significantly and there is huge noise along with information in the markets equilibrium pricing mechanism.

A study on the asymmetric effect of dividend announcement on the stock return : On the perspective of behavioral finance

A study on the asymmetric effect of dividend announcement on the stock return : On the perspective of behavioral finance

Herd Behaviour: How Decisive is the Noise in the NSE and BSE Stock Markets?

Do investors in the stock markets act/react on true information or noise? Do they believe on their own information or simply herd? The study seeks to explore these typical research queries from the behavioral finance perspectives. In particular, it develops a new theory of herding behavior and extends the models of Banerjee (1992) and Bikhchandani, Hirshleifer, and Welch (1992). The study also empirically tests the same on the Indian context with the high frequency intraday trading data for the real trade-time or time-stamp, trade-volume, and trade-price of ten sample scripts listed for their trading in both markets - the Bombay Stock Exchange (BSE) and the National stock Exchange (NSE). The study contributes to the literature with original findings. It shows that investors in the two Indian stock markets show crowd of positive and negative herding as well significantly and there is huge noise along with information in the markets equilibrium pricing mechanism.

POT model for operational risk: Experience with the analysis of the data collected from Chinese commercial banks

This paper takes 533 operational risk loss events publicly announced by Chinese commercial banks in the period of 1995-2012 as the sample, using Peaks over Threshold (POT) model to quantify the operational risk. The statistical data classification indicates the internal fraud is the main type of operational risk in Chinese commercial banks. This paper explains its causes from the perspective of behavioral finance. The results are as follows: first, Chinese commercial banks' operational risk loss events show an upward trend, then downward trend beginning in 2003 and currently an upward trend again; second, through the empirical analysis, this paper simulates the extreme value distribution function, finds the optimal threshold, and calculates the VaR and ES of the operational risk of Chinese commercial banks and compare them at different confidence levels; and third, in view of behavioral finance theory, overconfidence and loss aversion contribute to high internal fraud incidence.

Behavioral Finance and investment decisions

The way we look to investment decision has changed over time and behavioral finance has changed it radically: it provides an integrated view that describes how decision is actually made instead of how it should be from a strictly rational point of view. The attention is centered in the decision-maker, instead of in the decision itself, and in the cognitive, psychological, emotional and social aspects, that affect him in the decision process, are taken into account. Consequently, the markets function, from the behavioral finance perspective, is seen as the aggregation of those individual decisions. Challenging the traditional view, behavioral finance has the power to explain not only how people in fact make financial decisions but also how to improve them. Cristiana Cerqueira Leal, Professor of Finance at Minho University (Portugal), suggests the following readings:

Effects of Behavioural Finance on Emerging Capital Markets

A recent common view of finance experts is that it is becoming increasingly difficult to understand how the economy as a whole works. Although the efficient market theory might be considered an ideal model enabling the interpretation of market behavior, it has begun to lose ground, and the rationality hypothesis failed to explain the excessive volatility of the returns and trading volume recorded on both developed capital markets and emerging ones. Adding the behavioral finance perspective to the equation can help us to understand better how market agents will react. In this article, we investigate the factors that may explain the trading volume evolution on two emerging capital markets, Romania and Brazil. We analyze the impact of both investors who ground their trading behavior on rational expectations and investors who show behavioral errors as independent variables on the trading volume as dependent variable. The period under analysis covers four years, from June 2009 to June 2013, and includes the daily values of the most important indices traded on both markets, i.e. BET for Romania and IBOVESPA for Brazil, and the daily trading volume for each of the two indices. The results indicate that trading is influenced by the investors’ irrational behavior. Thus, the rationality hypothesis can be rejected for both capital markets.

Estimating the Probability of Meeting Financial Commitments: A Behavioral Finance Perspective Based on Business Simulations

AbstractIn an enterprise risk management environment, managers regularly can expect to be called upon to assess the probability that they will meet financial commitments. The ability to do so makes planning easier and enables the prudent risk taking that is crucial to driving growth. But even highly experienced managers are prone to overconfidence—one of the well‐known behavioral biases that can negatively affect their ability to form an accurate assessment. Estimating probability is, in fact, no simple task, and careers have been made and lost over met or missed commitments. Over the decades, a central theme of TRI Corporation's business simulations has been the issue of meeting commitments and managing risk. Now, a study of these simulations has shed light on the challenges inherent in the estimation process. Among the findings: Greater divergence in opinion among team members early in the estimating process can result in more accurate assessments, while divergence later in the process can weaken the team environment and lead to an inability to deliver on commitments. © 2014 Wiley Periodicals, Inc

Search for Alpha-Ema Weighted Momentum Based Approach

By exploiting momentum strategy; “buying winner portfolio and selling portfolio” this research papers investigates the evidence against the strong form of efficiency which claims that one cannot earn excess return with historical information and excess return if any, is mere compensation of excess risk taking behavior. The study undergone during the comprehensive research reveals the evidences of the weak form of efficiency and presence of meager weak momentum effect with holding period 1 month and in rest of the cases, on inclusion of transaction cost, such strategy will perform worse than buy and hold strategy. The trading strategy has been tested on SP and to De Bondt and Thaler’s contrarian effect. In addition, the author in his research has tried to analyze the causes of momentum and contrarian effects in general and results are analyzed from the perspective of behavioral finance. Also, the paper unfolds the comprehensive analysis of the calendar effect in the markets that might contribute to the weak momentum effect observed in the result.

Are Investors Rational? Evidence on the Impact of Industrial Framing Reclassification on Stock Market Reaction

This study utilizes the overall reclassification of industries policy to explore the postannouncement performance from a behavioral finance perspective. The presentation framing of the biotechnology and medical care industry is one with certainty prospects. This suggests that investors tend to buy more of these stocks because the government emphasizes the importance of this industry since 2002, which induces a significantly positive price effect. However, the reclassified eight electronic-related industries reveal presentation framings with uncertainty prospects. The heterogeneity of the high-technology industry thus leaves investors less tendency to hold these stocks and in turn a negative price effect. This paper shows some evidence and implication, suggesting a link between the presentation framing of industries and investors’ behavior.

Common Mistakes of Investors: From Behavioral Finance Perspectives

This is a presentation material discusses the basis of behavioral finance theory, findings of behavioral finance theory, and common mistakes of investors explained by behavioral finance theory.