Citation
Foster, F.D. and Kalev, P.S. (2016), "Editorial to the special issue of the International Journal of Managerial Finance – Behavioral Finance", International Journal of Managerial Finance, Vol. 12 No. 1. https://doi.org/10.1108/IJMF-10-2015-0186
Publisher
:Emerald Group Publishing Limited
Editorial to the special issue of the International Journal of Managerial Finance – Behavioral Finance
Article Type: Guest editorial From: International Journal of Managerial Finance, Volume 12, Issue 1.
This special issue explores topics in behavioral finance. Broadening the set of tools available to finance researchers (e.g. drawing from psychology, sociology, and other social sciences) can do much to strengthen our understanding of markets and capital allocation mechanisms. This special issue demonstrates the range of applications being developed by researchers.
The first two papers in this special issue consider corporate finance topics with behavioral finance tools. While the authors of both papers address questions about corporate financing, they do so in quite different and notable ways.
Ting et al. (2015) consider how managerial overconfidence influences corporate financing decisions. In particular they note the potential importance of "human, particularly CEO characteristics" on how decisions about capital formation are made. The approach in this paper is intriguing. The authors note that in Malaysia there have been some notable corporate losses in firms that were government-linked companies (GLCs). To the extent that firm management may be overconfident, might this be moderated through GLC status? More generally, how might GLC status influence firm behavior? The authors consider the interplay between capital structure choice, managerial confidence, and government ownership in Malaysia. Ting et al. draw on a number of intriguing measures of overconfidence: the size of the CEO's photo in the annual report, education, experience, gender, network, and past performance. Using this set of confidence measures Ting et al. note the important moderating role of government investment in an emerging market.
Tian et al. (2015) also considers capital structure differences through a behavioral finance framework. In this case, however, they look not to corporate managers, but to investors for the behavioral insight which provides for the empirical tests in the paper. The channel that Tian et al. use for their analysis is the link between investor sentiment and liquidity, and how this might influence discounts on secondary equity offerings (SEO). Declining investor sentiment is associated with deeper SEO discounts for less liquid stocks. This appears to be more than a simple adverse selection result – information asymmetries are related to SEO discounts, but not to shifts in investor sentiment. This result dovetails with earlier work in the USA and UK, but holds up in Australia, where SEOs are often placed privately.
From corporate finance the next set of two papers in this special issue move to analyses of share markets and trading. These researchers examine share market trading and the influence of noise and over-reaction by traders. Richie and Roszkowski (2015) focus on how investors react to Jim Cramer's share recommendations on his Mad Money television program. If the viewers of the show trade on Cramer's recommendations, and his views are not informed, then they are noise traders (see Shefrin and Statman, 1994). Richie and Roszkowski provide a rich analysis by focussing on the reaction to Cramer's recommendations across bull and bear markets. In doing so they document loss aversion as well as confirming herding and over-reaction hypotheses. Their sample period ranges from July 2005 through February 2009, thus incorporating the effects of the global financial crisis. While the authors present numerous results in their paper it is intriguing that the price impact of buy recommendations in bear markets are much more notable than sell recommendations in bull markets. This asymmetry suggests that investor reactions to recommendations are influenced by loss aversion.
Ramiah et al. (2015) take a somewhat different approach to examining noise trading and investor reaction to news. Using the model of Ramiah and Davidson (2007) they examine share trading at the Shenzhen Stock Exchange. They collect data on 180 firms which generate 28,478 news events for them to study. With this model they interpret the evidence as supporting under-reaction, over-reaction, and information pricing errors in the Shenzhen market. Across these factors they estimate a remarkably high level of noise trading in the Shenzhen market between 2002 and 2010.
The final paper in this special issue is a starting point for many readers with a developing interest in behavioral finance. Huang et al. (2015) provide a 20-year overview of behavioral finance research. Using ISI Web of Science data Huang et al. document significant growth in the number of manuscripts. Further they note the papers are concentrated in a list of "top ten" journals. Subsequent analysis documents key authors, research institutions, and types of analysis employed.
The papers included in this special issue are truly international – investigating hypotheses using data from Malaysia, Australia, China, and the USA. The findings and insights from these papers add to the growing international literature on behavioral finance as documented by Huang et al. (2015). Behavioral finance is being used in many ways to document how human interaction affects market mechanisms.
Professor F. Douglas Foster - The University of Sydney Business School, University of Sydney, Sydney, Australia
Professor Petko S. Kalev - School of Commerce, UniSA Business School, University of South Australia, Adelaide, Australia
References
Huang, J., Shieh, J. and Kao, Y.-C. (2016), "Starting points for a new researcher in behavioral finance", International Journal of Managerial Finance, Vol. 12 No. 1, pp. 92-103
Ramiah, V. and Davidson, S. (2007), "An information-adjusted noise model: evidence of inefficiency on the Australian stock market", The Journal of Behavioral Finance, Vol. 8 No. 4, pp. 209-224
Ramiah, V., Xu, X., Moosa, I. and Davidson, S. (2016), "An application of the information-adjusted noise model to the Shenzhen stock market", International Journal of Managerial Finance, Vol. 12 No. 1, pp. 71-91
Richie, N. and Roszkowski, A. (2016), "The impact of Mad Money recommendations during bull and bear markets", International Journal of Managerial Finance, Vol. 12 No. 1, pp. 52-70
Shefrin, H. and Statman, M. (1994), "Behavioral capital asset pricing theory", Journal of Financial and Quantitative Analysis, Vol. 23 No. 3, pp. 323-349
Tian, G.Y., Asem, E., Chung, J. and Cui, X. (2015), "Liquidity, investor sentiment and price discount of SEOs in Australia", International Journal of Managerial Finance, Vol. 12 No. 1, pp. 25-51
Ting, W.K.(Irene), Lean, H.H., Kweh, Q.L. and Azizan, N.A. (2016), "Managerial overconfidence, government intervention and corporate financing decision", International Journal of Managerial Finance, Vol. 12 No. 1, pp. 4-24