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Information environment and investor behavior

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  • Chang, Yen-Cheng
  • Cheng, Hung-Wen

Abstract

Market reactions to non-fundamental news (or no-news) reverse for extreme firm information environments. A one percentage increase in intangible returns for small firms (large firms) lead to a 2.33% decrease (0.70% increase) in monthly returns over the next 12months. The results are robust to firm characteristics adjustments, alternative measures of firm information environment and private information, idiosyncratic risk, and microstructure effects. The results are consistent with the cross-sectional findings of confirmation bias, where investors show stronger bias when the information environment is rich. We derive a model with confirmation bias that further explains the cross-sectional momentum pattern for the majority of firms in the market.

Suggested Citation

  • Chang, Yen-Cheng & Cheng, Hung-Wen, 2015. "Information environment and investor behavior," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 250-264.
    • Handle: RePEc:eee:jbfina:v:59:y:2015:i:c:p:250-264
    DOI: 10.1016/j.jbankfin.2015.06.013
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    5. Fan, Yubing & McCann, Laura & Qin, Hua, 2017. "Households’ Adoption of Drought Tolerant Plants: An Adaptation to Climate Change?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 42(2), May.

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    More about this item

    Keywords

    Behavioral finance; Confirmation bias; Intangible returns; Momentum;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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