Financial Engineering Seminar
September, 5, 2003 (Fri)
3:00 PM - 3:50 PM(8th period),
Weil Hall 307
Investor Confidence and Returns Following Large One-Day Price Changes
Abstract:
In this study, I hypothesize that post-event price behavior following large one-day price shocks is related to pre-event price and firm-fundamental characteristics and that these characteristics proxy for investor confidence. Several theories of behavior suggest how investors form their expectations and I suggest four investor confidence hypotheses based on these theories. My findings indicate that investors respond differently to negative price shocks than to positive price shocks. In particular, large decreases in price generally appear to drive positive post-event abnormal returns while large increases in price do not drive positive or negative abnormal returns. However, the main finding of this study is that this relationship is altered when pre-event return and firm characteristics are introduced. This suggests that certain pre-event characteristics influence investor confidence which in turn influences buying and selling decisions thereby driving post-event returns. However, investor's confidence appears to be lessened by the size of the price shock, which I refer to as the price shock effect.
Downloads:
Paper.pdf