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Although prior research documents that analysts sometimes herd their forecasts, very few studies investigate how investors’ judgments are influenced by their perceptions of the…
Abstract
Although prior research documents that analysts sometimes herd their forecasts, very few studies investigate how investors’ judgments are influenced by their perceptions of the likelihood of analyst herding. I conduct an experimental study to investigate the conditions under which investors’ assessments of uncertainty about future earnings are influenced by their perceptions of the likelihood of analyst herding. As expected, and consistent with motivated reasoning, the results show that the temporal order of analyst forecasts influences investors’ estimates of the likelihood of analyst herding and investors’ uncertainty judgments when analyst forecasts are preference-inconsistent but not when analyst forecasts are preference-consistent. This study provides a potential explanation for the mixed findings of prior research in regard to investors’ reactions to the likelihood of analyst herding. In addition, this study extends research on investors’ credulity by providing evidence that motivated reasoning and skepticism may serve as a mechanism that contributes to that credulity.
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This paper investigates how retailers can obtain value from their customer and prospect databases. In the current fickle economic climate it has never been so important for…
Abstract
This paper investigates how retailers can obtain value from their customer and prospect databases. In the current fickle economic climate it has never been so important for organisations to be able to provide added‐value insights into their immediate and longer‐term development. Total DM conducted a telephone and e‐mail survey amongst marketing professionals from or representing the UK’s top 1,000 companies to determine different sector’s ability to obtain short‐term customer acquisition costs and longer‐term ongoing customer profitability. Secondary research was then performed to measure data richness for each industry. This measure took different factors into account, including penetration of loyalty. Retailers were found to be the overall winners at extending commercial value from their customer and prospect databases. This was greatly influenced by the large volume of customer information potentially available to retailers. The survey concluded that it was individual retailers who were able to exploit their databases to the full who would be able to win investor confidence.
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Thiago Da Silva Telles Constantino, Antônio Carlos Magalhães Da Silva and Maria Aline Moreira De Oliveira Constantino
Most scientific research has focused on understanding Ponzi schemes from the point of view of the schemes and their operators, based on qualitative analysis. This paper aims to…
Abstract
Purpose
Most scientific research has focused on understanding Ponzi schemes from the point of view of the schemes and their operators, based on qualitative analysis. This paper aims to analyze Ponzi schemes from the perspective of their investors, emphasizing behavioral aspects, which have been little explored in the scientific literature, especially in quantitative research. In this way, the authors sought to understand the effects of heuristics and cognitive biases in understanding investor behavior.
Design/methodology/approach
A logistic regression was carried out with Brazilian investors, some of them participants in Ponzi schemes, who answered a structured questionnaire by means of a survey.
Findings
The authors found that social pressures, overconfidence and deliberate ignorance lead to credulity, generating little risk analysis and the desire to make a lot of money quickly.
Practical implications
Helping investors improve their levels of information through financial education and self-knowledge about their behavior. Contribute to the competent authorities in the search for improvements in the information displayed to investors.
Social implications
Understanding the mechanisms used when making a financial decision from the point of view of investors in general, but especially those exposed to Ponzi schemes, has the mission of enlightening them about the importance of financial education and the weight of psychological factors so that they can reduce the effects of heuristics and analysis biases when faced with a financial decision.
Originality/value
The basis of this work will be the inclusion of psychological variables and financial education, adapting existing models in an attempt to demonstrate the effects they may or may not have on mental accounting in the specific case of investors
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Viktoria Dalko, Bryane Michael and Michael Wang
This paper aims to show that market power exists in financial markets and analyze how spoofing is used by a high-frequency trader to build market power by taking advantage of both…
Abstract
Purpose
This paper aims to show that market power exists in financial markets and analyze how spoofing is used by a high-frequency trader to build market power by taking advantage of both behavioral weaknesses of individual investors and microstructural loopholes of trading venues.
Design/methodology/approach
After showing that market power exists in the financial market, this paper centers around the question of how market power is constructed in the financial market. To sharpen the answer to the question, the paper compares the conditions needed for market power construction in the financial market with those needed in the goods market. The paper selects spoofing, the frequently used order-based tactic in high-frequency trading strategies, to analyze in detail how spoof orders can ignite herding with market power building as the essence. The Flash Crash that occurred in the New York Stock Exchange on May 6, 2010 provides an excellent case of market power construction exhibited in spoofing.
Findings
The behavioral mechanism of market power construction in the case of spoofing is perception alignment. It becomes effective when two necessary conditions are met: the spoof trader takes advantage of the incomplete order display set up by the exchange; and the behavioral weaknesses exhibited by numerous individual investors. In addition to these key conditions, this paper finds other ones for market power to be created in the financial market. They are easier, quicker, more secret, more flexible and less risky relative to the conditions for market power building in the goods market.
Practical implications
The detailed analysis points to the behavioral mechanism, i.e. perception alignment, and microstructural mechanism, i.e. incomplete order display, that could be responsive to regulation.
Originality/value
The originality of the findings is to uncover the mechanism of spoofing in taking advantage of behavioral biases of individual investors. The value is to gain more complete understanding of the essence of herding caused by spoofing.
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The purpose of this paper is to uncover an institutional reason behind herding and the key to successful execution of the accumulation-lift-distribution (ALD) trading strategy.
Abstract
Purpose
The purpose of this paper is to uncover an institutional reason behind herding and the key to successful execution of the accumulation-lift-distribution (ALD) trading strategy.
Design/methodology/approach
The paper proposes the perception alignment hypothesis (PAH), which is based on a large number of empirical episodes. Extensive empirical and theoretical literature of 79 articles is reviewed. These are selected from previously unrelated fields of prosecuted cases in market manipulation, sell-side analysts’ recommendations and internet rumors. These studies are put into a unifying conceptual framework.
Findings
The proposed PAH can explain some herding episodes that were generated for the purpose of executing ALD.
Practical implications
The value of the approach is that while behavioral biases are hard to change, perception alignment can be more responsive to regulation.
Originality/value
This paper is the first to propose the PAH. It provides an explanation for the causality of herding that complements the traditional literature on the psychological weaknesses of investors. This paper opens a debate on whether the stock market is fully competitive because investors have behavioral biases and certain institutions take advantage of those biases.
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This paper examines the issue of fraud on the Internet and discusses three areas with significant potential for misleading and fraudulent practices, namely: securities sales and…
Abstract
This paper examines the issue of fraud on the Internet and discusses three areas with significant potential for misleading and fraudulent practices, namely: securities sales and trading; electronic commerce; and the rapid growth of Internet companies. The first section of the paper discusses securities fraud on the Internet. Activities that violate US securities laws are being conducted through the Internet, and the US Securities and Exchange Commission has been taking steps to suppress these activities. The second section of the paper discusses fraud in electronic commerce. The rapid growth of electronic commerce, and the corresponding desire on the part of consumers to feel secure when engaging in electronic commerce, has prompted various organizations to develop mechanisms to reduce concerns about fraudulent misuse of information. It is questionable, however, whether these mechanisms can actually reduce fraud in electronic commerce. The third section of the paper discusses the potential for fraud arising from the rapid growth of Internet companies, often with little economic substance and lacking traditional management and internal controls. The paper examines the three areas of potential Internet fraud mentioned above and suggest ways in which these abuses may be combated.
Wen‐Ben Yang, Junming Hsu and Tung‐Hsiao Yang
The purpose of this paper is to investigate the interaction between earnings management and institutional shareholdings of firms conducting seasoned equity offerings (SEOs).
Abstract
Purpose
The purpose of this paper is to investigate the interaction between earnings management and institutional shareholdings of firms conducting seasoned equity offerings (SEOs).
Design/methodology/approach
The authors work on three issues: first, whether earnings management of firms conducting seasoned equity offerings (SEOs) affects institutional investors' investment in their stocks; second, whether SEO firms' earnings management induces insider selling; and third, whether earnings management and changes in old and new institutional shareholdings around SEOs can jointly predict the long‐run post‐issue performance.
Findings
The results show that firms with aggressive earnings management attract more new institutions to buy their shares and induce heavy insider selling after SEOs, but perform worse in the long run. Firms with conservative earnings management and a significant increase in new institutional shareholdings after SEOs perform well.
Originality/value
These results reveal that issuers manage earnings aggressively to be better off in the short run by obtaining more funds, receiving new institutional investment, and possibly allowing their insiders to sell stocks at higher prices, but to make shareholders worse off in long run by reducing their wealth. The positive relation between new institutions' participation and issuers' performance implies that some of these institutions have private information about or can effectively monitor SEO firms.
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Kirsi Snellman, Henri Hakala and Katja Upadyaya
We theorize the critical role of angel investors' affective experiences and first impressions in the context of entrepreneurial finance. We develop a model and propositions to…
Abstract
Purpose
We theorize the critical role of angel investors' affective experiences and first impressions in the context of entrepreneurial finance. We develop a model and propositions to illustrate why angel investors make the decision to continue screening, thus explaining why certain investment proposals make it, while others do not.
Methodology/Approach
Drawing on affective events theory and the literature on affective experiences, we theorize how the perceptions of pitches that trigger positive or/and negative physiological arousal, short-lived emotions, and associated thoughts are different, thus allowing us to build new theory of how these different experiences can influence the outcome of the evaluation process in the initial screening stage.
Findings
Our model suggests that the initial evaluation unfolds in five stages: perception of an entrepreneurial pitch, physiological arousal, emotions, first impression, and a decision to continue screening. When different manifestations of physiological arousal and subsequent emotions set the tone of first impressions, they can be either a positive, negative, or mixed experience. While positive and mixed first impression can lead to selection, negative first impression can lead to rejection.
Originality/Value
We illustrate what is of value for angel investors when they look for new investments, and why certain entrepreneurial pitches lead to the decision to continue screening, while others do not. We propose that what angel investors feel is particularly important in situations where they are not yet making the ultimate decision to invest money but are involved in decisions about whether to continue to spend time to investigate the investment proposal.
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This chapter analyzes the early post-transition privatization and enterprise reform efforts of three major countries: Poland, Czechoslovakia (subsequently the Czech Republic), and…
Abstract
This chapter analyzes the early post-transition privatization and enterprise reform efforts of three major countries: Poland, Czechoslovakia (subsequently the Czech Republic), and the Soviet Union (subsequently Russia). For each, it discusses the prevailing ideologies of key decision makers and their external advisors prior to and during the transition process, the initial conditions faced by reformers and advisors, the policy frameworks that evolved, the results achieved, the mistakes made, and the opportunities missed. The ultimate conclusion is that while privatization could have and probably should have been done better, it nonetheless had to be done. The Czech Republic and Russia, and others in the region, are better off after the flawed privatizations they carried out than they would have been had they avoided or delayed divestiture. Poland, which did quite well at first in the absence of mass and rapid privatization, now finds itself burdened with a number of expensive and unproductive state firms. This chapter shows how and why these outcomes came about, and discusses the role of external advisors in the process.
From a strategic point of view, focusing on dividends is putting the cart before the horse. What directly affects the long‐term economic performance of a firm is how much of its…
Abstract
From a strategic point of view, focusing on dividends is putting the cart before the horse. What directly affects the long‐term economic performance of a firm is how much of its cash it plows back into the business. Dividends should be a potential use for funds remaining after key reinvestment decisions are made, rather than the other way around.