Volume 2, Number 4, 2001 Abstracts
© Copyright Erlbaum 2000 & 2001

Toward an Understanding of the Risky Choice Behavior of Professional Financial Analysts
James E. Hunton
Ruth Ann McEwen
Sudip Bhattacharjee

Several studies have reported inefficiencies and/or biases in analysts'ability to incorporate new information into their earnings forecasts. We propose that an important psychological factor associated with optimistic earnings forecasts is the propensity of analysts to engage in risky choice behavior as described by prospect theory. Furthermore, the motivational incentives faced by analysts may exacerbate risky choice behavior during forecast revision, thereby magnifying overestimates of earnings. Sixty professional financial analysts were asked to issue a first quarter and then an annual EPS forecast of a company. The analysts were randomly assigned to two initial forecast accuracy conditions that indicated their initial forecast earnings was 1) essentially the same as actual earnings, or 2) substantially higher than actual earnings. Analysts were also assigned to one of three motivational incentive conditions indicating the analyst and brokerage firm would 1) have no future contact with the fore-cast firm, 2) begin to follow the forecast firm, or 3) establish an underwriting relationship with the forecast firm. The results indicate that analysts who perceived a loss function due to the inaccuracy of prior earnings forecasts tended to choose riskier prospects in subsequent forecast revisions than analysts who perceived their prior earnings forecasts to be ac-curate. These riskier prospects translate into greater overestimates of earnings. Furthermore, while the average risk attitude of the analysts was optimistic, higher levels of motivational incentives were associated with greater risk-seeking behavior by the analysts who perceive a loss function. It appears that the motivational incentives inherent in brokerage firms can exacerbate the risky choice behavior of financial analysts during forecast revision. These findings support the utility of incorporating both cognitive and motivational factors into the prediction of analyst behavior.

Momentum, Rational Agents and Efficient Markets
John Crombez

Descriptive behavioral models explain the momentum anomaly by assuming that financial agents are irrational. However, investors are not tested to be susceptible to the cognitive failures observed in psychological experiments. We consider an environment where financial agents are rational, markets are efficient as defined by the Grossman—Stiglitz [1980] efficiency, and there are market imperfections in the information market. Based on a simulation experiment, we find that returns on momentum strategies can exist in this environment because of the noise in expert information. We empirically find that even in a sample of large and liquid stocks, this noise is still ob-servable and, hence, momentum can be empirically found for these samples even when agents are rational and markets are efficient.

Visibility, Institutional Preferences and Agency Considerations
Lucy F. Ackert
George Athanassakos

We show that market frictions and agency considerations are important concerns when institutional investors make portfolio allocation decisions. For a sample of widely followed firms, institutional holdings increase with increases in visibility as measured by the number of analysts following the firm. We also report a significant seasonal pattern in institutional holdings consistent with the gamesmanship hypothesis, which asserts that institutions rebalance their portfolios in response to agency considerations. Finally, we find that excess returns are highly seasonal with performance, deteriorating when the following by financial analysts increases. "Followed" firms actually exhibit inferior market performance over the 1981—1996 sample period.

Are Malaysian Investors Rational?
Ming-Ming Lai
K. L. T. Low
Ming-Ling Lai

This paper examines the investment practices of Malaysian institutional investors during the bullish and bearish periods. The factors and forces that drive the Malaysian stock market are also identified. The investors used a lot of information within and outside the firm before making any stock selection. The analysis of fundamentals appears to be the most popular method for share appraisal. The survey findings demonstrated that Malaysian investors appeared to be rational and prudent in making financial decisions.

An Experimental Study of the Disposition Effect: Evidence From Macau
Peter M. W. Chui

The disposition effect–the tendency to sell winning transactions too soon and hold losing transactions too long–is examined experimentally in Macau. The findings show that the disposition effect exists strongly under the modified version of the experiment designed by Weber and Camerer [1998]. This study also points out that a psychological factor, the locus of control, can partly explain the disposition effect observed in this experiment.