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Relative visibility and attraction in asset pricing
Matthias Bank
Banken und Finanzen, University of Innsbruck, Austria
Discussant: Hannes Mohrschladt (University of Potsdam)
Numerous studies show that stocks that attract a lot of investor attention tend to have low subsequent returns. Motivated by these findings, I proxy the relative visibility of stocks in the cross section with their ranked abnormal return volatility. I argue that this simple measure is consistent with salience theory as well as the concept of information gaps, curiosity, and motivated attention. For a sample of US large-cap stocks, I show that both high (low) relative visibility alone and combined with high uncertainty, as proxied by idiosyncratic volatility, lead to statistically and economically low (high) subsequent returns. The results are consistent with time-varying expected returns and a large predictable return component.
12:00pm - 12:30pm
Satispricing
Clemens Mueller, Patrick Verwijmeren
Erasmus University Rotterdam, Netherlands, The
Discussant: Matthias Bank (Universität Innsbruck)
A substantial fraction of IPOs is priced at exactly the high-end of the pricing range. We find that these IPO prices are predictably biased. Investing in IPOs priced at the high-end leads to first-day returns that are 8 percentage points higher than investing in IPOs that are priced just below or above the high-end. We argue that these results are in line with managerial satisficing, in which managers stop seeking higher outcomes and settle for satisfactory results.
12:30pm - 1:00pm
Strategic communication with a myopically loss averse investor
Thomas Langer1, Nils Lohmeier1, Hannes Mohrschladt1,2
1University of Münster; 2University of Potsdam
Discussant: Clemens Mueller (Erasmus University Rotterdam)
We study a dynamic communication model with a myopically loss averse investor as information recipient. In a multi-period setting, the manager learns about the firm's fundamental value earlier than the investor and can report this information either truthfully or with a bias. We assume that the manager's communication strategy aims at optimizing the investor's perception of firm performance. Our model predicts that the manager will try to avoid downward price movements, which are disproportionally detrimental to the investor. In particular, the manager will claim stock values close to the investor's prior expectation to avoid immediate or future down movements. We examine the asset pricing implications of this communication strategy and find that managerial behavior can reduce volatility and cause momentum.
