Investor Behavior and Information

Investor behavior was measured on a firm-by-firm basis by the volume of transactions in the stock of a firm. While data on an individual investor by individual investor basis would be desirable, it is not as readily available as stock volume data. Volume represents a simple summation of individual actions and can be considered at least a partial disaggregation of stock-market activity.The reasons for individual investor action were considered to be (1) a change in trade-off between risk and return, (2) the unfolding of time-dependen consumption plans, and (3) perception of information that changes expectations. It was argued that, in general, the first reason can be ignored, occurring at discrete and probably lonq intervals, and that the second reason is unlikely to have an effect over a few years on the total volume of transactions in the stock of a given firm. Thus, fluctuations in such volume were considered to reflect perception of information about the given firm by investors in that firm.Market behavior was analyzed in terms of general market movements and market movements specific to the firm. Market-wide effects on both price changes and volume of transactions.in the stock of a given firm were filtered out. This left price changes indicating the flow of, and volume indicating a reaction to, information unique to the given firm.Perception of information about a given firm by investors, measured as indicated above, was then examined for association with the flow of information coming onto the market as indicated by fluctuations in the price of the stock of the firm net of market-wide effects. The percentage of volume of transactions in the stock of a given firm that was explained by fluctuations in the stock price was taken as a measure of the efficiency of investor behavior with respect to the given firm. The validity of accepting this interpretation is based on the following assumptions: (1) the probability that investors' demands for a given stock continually exactly offset each other in such a manner that volume occurs without price change is negligible, (2) specialists in securities are unable to perfectly anticipate changes in market demand in such a manner that price changes occur without volume.