Volume 4, Number 3, 2004 Abstracts
© Copyright Erlbaum 2003

Categorical Thinking in Stock Portfolio Management: A Puzzle?
Isabelle Bajeux-Besnainou-The George Washington University
Kurtay Ogunc-Watson Wyatt Worldwide

"What Goes Up Must Come Down"-How Charts Influence Decisions to Buy and Sell Stocks
Thomas Mussweiler-University of Wurzburg, Germany
Karl Schneller-University of Wurzburg, Germany

Five experiments examine how charts depicting past stock prices influence investing decisions. We expected investors to use extreme past prices depicted in charts as comparison standards to which expectations about future prices are assimilated. Investors should thus expect stocks depicted in a chart with a salient high to perform better than stocks depicted in a chart with a salient low. And as a consequence, investors should be more likely to buy and less likely to sell stocks depicted in a chart with a salient high than a low. Results of five experiments support this reasoning. Whether investors are private or professional and whether background information about the stock was limited or abundant, expectations about future prices assimilated to extreme past prices. Consequently, investors buy more and sell less when the critical chart is characterized by a salient high than a low. The implications of these findings for the core role comparison processes play in investing decisions are discussed.

Profit Warnings and the Pricing Behavior of ADRs
Dave Jackson-University of Texas-Pan American_Jeff Madura-Florida Atlantic University

We assess the pricing behavior of American Depositary Receipts (ADRs) in response to information about their profitability. Specifically, we test for leakage effects and lagged effects, and we assess the cross-sectional variation in market inefficiencies related to profit warnings by foreign firms listed on U.S. stock exchanges as ADRs. Foreign firms experience strong negative valuation effects at the time of the profit warning. Furthermore, there are pronounced leakage effects, which suggests that some market participants were able to capitalize on inside information before the profit warnings were issued. We also find statistically significant evidence of a three-day lag effect following the profit warning, which suggests that investors who did not have inside information could profit from a warning. When using the leakage as a proxy, the degree of market inefficiency is more pronounced for firms in the technology sector, but the extent of government ownership or countries of origin are not significant determinants of market revaluation following a profit warning. Overall, the pricing behavior of ADRs in response to profit information allows for potential arbitrage opportunities.

On Characteristics Momentum
Hsiu-lang Chen-Department of Finance, University of Illinois at Chicago

This article investigates whether investors can benefit from information about equity style evolution. The study shows that portfolios formed by firm characteristics such as size, book-to-market, and/or dividend yield can be used to determine investment style dominance. Characteristics momentum, buying stocks with persistent in-favor characteristics and selling stocks with persistent out-of-favor characteristics, conveys valuable information about future stock returns. It is distinct and has longer-lasting effects than price or industry momentum in predicting future returns. In explaining the existence of characteristics momentum profits, this study highlights the importance of slow evolution of changes in firm characteristics. The lifecycle of investment styles can thus have predictive power for trend-chasing investors, who can potentially push up the price of stocks with an in-favor style, and depress the price of stocks with an out-of-favor style.

Short-Term Overreaction in the Hong Kong Stock Market: Can a Contrarian Trading Strategy Beat the Market?
Isaac Otchere-Department of Finance, The University of Melbourne and University of New Brunswick
Jonathan Chan-Department of Finance, The University of Melbourne

In this paper, we examine the short-run overreaction phenomenon in the Hong Kong market using data from March 1996 to June 1998. The study period encompasses the pre- and post-Asian financial crisis period. Consistent with prior studies on other markets, we find evidence of overreaction in the Hong Kong market prior to the Asian financial crisis. The overreaction phenomenon is more pronounced for winners than losers. While we document evidence of overreaction in the pre-crisis period, we find that abnormal profits obtained from exploiting such a phenomenon are economically insignificant after accounting for transaction costs. Thus, the Hong Kong stock market is efficient in the weak form. We also explore the possibility that the results are affected by factors such as the bid-ask bounce, the size effect, and the day-of-the-week effect. The results, however, are robust to these factors.

Financial Analysts, Firm Quality, and Social Responsibility
Hoje Jo-Leavey School of Business, Santa Clara University

We suggest that financial analysts have an incentive to follow the stocks of socially responsible companies, because such stocks meet the growing demands and psychology of the investment community, who want to combine the usual investment goals with social responsibility. Socially responsible investors prefer to hold stocks of companies they perceive as socially responsible or of high quality. Financial analysts then help brokers' marketing efforts by supplying investors with more analysis for stocks of socially responsible or high-quality companies. Using scores from Fortune surveys on perceptions of community and environmental responsibility as a measure of social responsibility and Fortune survey measures of quality as a measure of company quality, we find evidence that stocks of socially responsible and high-quality companies are indeed followed by more financial analysts. The positive relationship among social responsibility, company quality, and analyst following remains significant even after controlling for the effects on analyst following of firm size, share price, the volatility of stock returns, and market-to-book value of equity.

Research Elsewhere
Robert A. Olsen-California State University, Chico, and Decision Research, Eugene, OR