Information Flow in Capital Markets - Novel empirical evidence on information processing in financial markets and the role of behavioral biases

Since the start of the 21st century, the world has seen a significant proliferation of openly available information. While drastic increases in the availability of information have been observed in all areas of everyday life, they are particularly pronounced in financial markets. In parallel, technological evolution and novel methods of data analysis have significantly altered how information is analyzed and incorporated by investors. Despite its merits for market efficiency and price discovery, this development entails a significant risk of increased information asymmetries due to a higher disparity between sophisticated investors who are able to make use of such technology and those investors who are not. Research has further shown that investors, when provided with too much information at once, are not able to fully comprehend and incorporate all information leading to irrational investment behavior. It is hence of particular importance to fully understand how information is provided, processed, and incorporated in financial markets. While there already exists a growing literature on biased decision-making and information processing in financial markets, research gaps remain. Questions that are, so far, still unanswered in most contexts are, for example: Does the increasing access to information enable sophisticated institutional investors to correctly assess and seize behavioral biases of executives? Are retail investors able to correctly interpret (and potentially devalue) information signals provided by irrational executives? How do investors behave in times of crises and concomitant information overload? Do investors also incorporate the informational quality of public disclosures (and not only its information content) when assessing a firm’s prospects and risks? Do executives anticipate these market reactions and potentially strategically manipulate information signals to provoke market reactions for the firm’s or their own benefit? By conducting four disjunct empirical research studies of which each constitutes one chapter of this dissertation, I hope to close some of these research gaps. More precisely, in the first two chapters, I shed light on whether and how investors react to information signals provided by overconfident executives (Chapter 2) and how information of such executives is perceived in times of crises (Chapter 3). These studies are then further complemented by an analysis of how investors in particularly emotionally charged stocks react to different events in times of particularly high information overflow (e.g., during a crisis) in Chapter 4. Finally, an analysis of whether investors also incorporate measures of informational quality and not only the information itself in their investment decisions and whether executives anticipate and strategically manage investor reactions to certain disclosures concludes in Chapter 5.