Comparing with prior studies mainly focused on the
effect of a certain event (it may be the initial announcement of bad
news or the repeated announcements of identical bad news) on stock
price, the aim of this study is to explore how investors react to
subsequent bad news with identical content. Empirical results show
that as a result of behavioral pitfalls, investors underreact to the initial
announcement of the bad news (i.e., unknown bad news) and overreact
to the repeated announcements of the identical bad news (i.e., known
bad news).
[1] H. Leland and D. Pyle, “Information asymmetries, financial structure, and
financial intermediation,” Journal of Finance, vol. 32, pp. 371-387, 1977.
[2] A. Thakor, “An exploration of competitive signaling equilibria with third
party information production: The case of debt insurance,” Journal of
Finance, vol. 37, pp. 717-739, 1982.
[3] D. Kahneman and A. Tversky, “Prospect theory: An analysis of decision
under risk,” Econometrica, vol. 47, pp. 263-291, 1979.
[4] F. Black, “Noise,” Journal of Finance, vol. 41, pp. 529-543, 1986.
[5] K. Daniel, D. Hirshleifer, and A. Subrahmanyam, “Investor psychology
and security market under-and overreactions,” Journal of Finance, vol.
53, pp. 1839-1886, 1998.
[6] W. F. M. De Bondt, “A portrait of the individual investor,” European
Economic Review, vol. 42, pp. 831-844, 1998.
[7] H. Shefrin, “Beyond greed and fear: Understanding behavioral finance
and the psychology of investing (1st ed.),” Boston: Harvard Business
School Press, 2000.
[8] A. M. Hibbert, R. T. Daigler, and B. Dupoyet, “A behavioral explanation
for the negative asymmetric return-volatility relation,” Journal of
Banking and Finance, vol. 32, pp. 2254-2266, 2008. [9] C.-H. Chang, “IPO underpricing: A social comparison perspective,”
International Review of Economics and Finance, vol. 20, pp. 367-375,
2011.
[10] C.-H. Chang and W.-S. Chiang, “Conditioning responses towards
measures relating to the capital cost of short-sellers: Evidence from
Taiwan,” Review of Pacific Basin Financial Markets and Policies, vol.
17, pp. 1450019-1~1450019-27, 2014.
[11] L. Liang, “Post-earnings announcements drift and market participants’
information processing biases,” Review of Accounting Studies, vol. 8, pp.
321-345, 2003.
[12] N. Barberis and R. Thaler, “A survey of behavioral finance,” in the
Handbook of the economics of finance, edited by G. Constantinides, M.
Harris, and R. Stultz, North-Holland, 2004.
[13] D. M. Cutler, J. M. Porterba, and L. M. Summers, “Speculative
dynamics,” Review of Economic Studies, vol. 58, pp. 529-546, 1991.
[14] N. Barberis, A. Shleifer, and R. Vishny, “A model of investor sentiment,”
Journal of Financial Economics, vol. 49, pp. 307-343, 1998.
[15] C.-H. Chang and K. C. Chan, “Investment banks’ stock ratings, call
warrant issuance, and responses from heterogeneous investors: Evidence
from Taiwan,” International Review of Economics & Finance, vol. 20, pp.
733-743, 2011.
[16] P. Liu, S. D. Smith, and A. A. Syed, “Stock price reactions to the Wall
Street Journal’s securities recommendations,” Journal of Financial
Quantitative Analysis, vol. 25, pp. 399-410, 1990.
[17] E. F. Fama and K. R. French, “The cross-section of expected stock
returns,” Journal of Finance, vol. 47, pp. 427-465, 1992.
[18] S. J. Brown and J. B. Warner, “Using daily stock returns: The case of
event studies,” Journal of Financial Economics, vol. 14, pp. 9-31, 1985.
[19] W. L. Megginson and K. A. Weiss, “Venture capitalist certification in
initial public offerings,” Journal of Finance, vol. 46, pp. 879-903, 1991.
[20] J. W. Cooney, H. K. Kato, and J. S. Schallhein, “Underwriter certification
and Japanese seasoned equity issues,” Review of Financial Studies, vol.
16, pp. 949-982, 2003.
[21] A. Sufi, “The real effects of debt certification: Evidence from the
introduction of bank loan rating,” Review of Financial Studies, vol. 22,
1659-1691, 2009.
[22] O. Bosch and S. Steffen, “On syndicate composition, corporate structure
and the certification effect of credit ratings,” Journal of Banking and
Finance, vol. 35, pp. 290-299, 2011.
[1] H. Leland and D. Pyle, “Information asymmetries, financial structure, and
financial intermediation,” Journal of Finance, vol. 32, pp. 371-387, 1977.
[2] A. Thakor, “An exploration of competitive signaling equilibria with third
party information production: The case of debt insurance,” Journal of
Finance, vol. 37, pp. 717-739, 1982.
[3] D. Kahneman and A. Tversky, “Prospect theory: An analysis of decision
under risk,” Econometrica, vol. 47, pp. 263-291, 1979.
[4] F. Black, “Noise,” Journal of Finance, vol. 41, pp. 529-543, 1986.
[5] K. Daniel, D. Hirshleifer, and A. Subrahmanyam, “Investor psychology
and security market under-and overreactions,” Journal of Finance, vol.
53, pp. 1839-1886, 1998.
[6] W. F. M. De Bondt, “A portrait of the individual investor,” European
Economic Review, vol. 42, pp. 831-844, 1998.
[7] H. Shefrin, “Beyond greed and fear: Understanding behavioral finance
and the psychology of investing (1st ed.),” Boston: Harvard Business
School Press, 2000.
[8] A. M. Hibbert, R. T. Daigler, and B. Dupoyet, “A behavioral explanation
for the negative asymmetric return-volatility relation,” Journal of
Banking and Finance, vol. 32, pp. 2254-2266, 2008. [9] C.-H. Chang, “IPO underpricing: A social comparison perspective,”
International Review of Economics and Finance, vol. 20, pp. 367-375,
2011.
[10] C.-H. Chang and W.-S. Chiang, “Conditioning responses towards
measures relating to the capital cost of short-sellers: Evidence from
Taiwan,” Review of Pacific Basin Financial Markets and Policies, vol.
17, pp. 1450019-1~1450019-27, 2014.
[11] L. Liang, “Post-earnings announcements drift and market participants’
information processing biases,” Review of Accounting Studies, vol. 8, pp.
321-345, 2003.
[12] N. Barberis and R. Thaler, “A survey of behavioral finance,” in the
Handbook of the economics of finance, edited by G. Constantinides, M.
Harris, and R. Stultz, North-Holland, 2004.
[13] D. M. Cutler, J. M. Porterba, and L. M. Summers, “Speculative
dynamics,” Review of Economic Studies, vol. 58, pp. 529-546, 1991.
[14] N. Barberis, A. Shleifer, and R. Vishny, “A model of investor sentiment,”
Journal of Financial Economics, vol. 49, pp. 307-343, 1998.
[15] C.-H. Chang and K. C. Chan, “Investment banks’ stock ratings, call
warrant issuance, and responses from heterogeneous investors: Evidence
from Taiwan,” International Review of Economics & Finance, vol. 20, pp.
733-743, 2011.
[16] P. Liu, S. D. Smith, and A. A. Syed, “Stock price reactions to the Wall
Street Journal’s securities recommendations,” Journal of Financial
Quantitative Analysis, vol. 25, pp. 399-410, 1990.
[17] E. F. Fama and K. R. French, “The cross-section of expected stock
returns,” Journal of Finance, vol. 47, pp. 427-465, 1992.
[18] S. J. Brown and J. B. Warner, “Using daily stock returns: The case of
event studies,” Journal of Financial Economics, vol. 14, pp. 9-31, 1985.
[19] W. L. Megginson and K. A. Weiss, “Venture capitalist certification in
initial public offerings,” Journal of Finance, vol. 46, pp. 879-903, 1991.
[20] J. W. Cooney, H. K. Kato, and J. S. Schallhein, “Underwriter certification
and Japanese seasoned equity issues,” Review of Financial Studies, vol.
16, pp. 949-982, 2003.
[21] A. Sufi, “The real effects of debt certification: Evidence from the
introduction of bank loan rating,” Review of Financial Studies, vol. 22,
1659-1691, 2009.
[22] O. Bosch and S. Steffen, “On syndicate composition, corporate structure
and the certification effect of credit ratings,” Journal of Banking and
Finance, vol. 35, pp. 290-299, 2011.
@article{"International Journal of Business, Human and Social Sciences:71980", author = "Liang-Chien Lee and Chih-Hsiang Chang and Ying-Shu Tseng", title = "Investors’ Misreaction to Subsequent Bad News", abstract = "Comparing with prior studies mainly focused on the
effect of a certain event (it may be the initial announcement of bad
news or the repeated announcements of identical bad news) on stock
price, the aim of this study is to explore how investors react to
subsequent bad news with identical content. Empirical results show
that as a result of behavioral pitfalls, investors underreact to the initial
announcement of the bad news (i.e., unknown bad news) and overreact
to the repeated announcements of the identical bad news (i.e., known
bad news).", keywords = "Subsequent bad news, Behavioral finance, Investors’
misreaction, Behavioral pitfalls.", volume = "10", number = "2", pages = "401-6", }
