Volume 7, Number 3, 2006 Abstracts
© Copyright Erlbaum 2006

Did Investor Sentiment Foretell the Fall of ENRON?
Harry F. Griffin-The University of Montevallo

In the aftermath of the ENRON Corporation failure, we acknowledge that many investors experienced a financial loss when their ENRON equity holdings lost market value. Our research centers upon the loss of that market value, and when the capital market first signaled the positive potential of that loss. An examination of ENRON option open interest from January 1, 2000 through December 31, 2001 reveals that such information was available, observable, and inferential a year earlier.

The Impact of U.S. Individual and Institutional Investor Sentiment on Foreign Stock Markets
Rahul Verma-University of Houston-Downtown
Gökçe Soydemir-University of Texas-Pan American

This study examines the degree to which U.S. individual and institutional investor sentiments are propagated abroad. Previous studies construe investor sentiments as fully irrational; we find contrary evidence that individual and institutional investor sentiments are driven by both rational and irrational factors, with distinct effects on domestic and international stock market returns. The generalized impulse response functions from VAR model estimations show that U.S. institutional investor sentiments have varying degrees of impact on the equity markets of the U.K., Mexico, and Brazil, and no effect on Chile. Specifically, the individual investor sentiment effect is statistically significant only for the U.K market. Not surprisingly, the two classes of investor sentiments have a strong significant effect on the U.S. stock market returns. The response of the U.S. to individual investor sentiments is relatively more erratic, while the response to institutional investor sentiments is smoother. This difference in pattern becomes more visible when we consider the response of the foreign stock markets. We find significant effects of rational sentiments of institutional investors on the U.S., the U.K., Mexico, and Brazil. However, there is an insignificant effect of the irrational sentiments on the same set of countries. A direct implication of our empirical evidence is that it is important for international asset pricing models to consider the role of rational sentiments of institutional and individual investors on developed and emerging markets.

Evidence of the Endowment Effect in Stock Market Order Placement
Andreas Furche-Capital Markets Cooperative Research Centre in Sydney
David Johnstone-University of Sydney

The psychological endowment effect is apparent when investors place greater value on something when they mentally "own" it than when someone else owns it. Although this effect is well established in laboratory studies, there is relatively little documented evidence of an endowment bias in actual trading. This study examines order placements of stock traders on the Australian Stock Exchange. Consistent with the endowment effect, sellers appear to value their own shares higher than buyers independent of current market price, by consistently placing sell orders on average "further from the market" (i.e., from the best quote) than buy orders. This asymmetry is more pronounced in private client trading than in orders made through institutional brokers, suggesting that more sophisticated investors are less affected by asset ownership than the private clients of retail brokers. Since private "day traders" have been able to trade online themselves rather than through a broker, the quote asymmetry relative to the best-standing quotes between asks and bids has become more pronounced. Over the same period, the relatively small asymmetry apparent in institutional quotes has remained unchanged.

Firm Image and Individual Investment Decisions
Lucy F. Ackert-Kennesaw State University
Bryan K. Church-Georgia Tech

This paper documents the importance of firm image in individual investment behavior. We conduct three experiments designed to examine whether investment decisions are influenced by selective information disclosures that are intended to promote a positive or negative firm image. Importantly, the disclosures are not value-relevant. Participants actively make investment decisions that have real economic consequences. We find that participants invest more heavily in firms with a positive image than in firms with a negative image, controlling for industry membership and financial data. These results are consistent with economic models of choice that recognize that the financial outcome is not the only argument in a person's utility function.

The Characteristics of Online Investors
Konari Uchida-The University of Kitakyushu

Recent studies have documented a strong tendency for individual investors to delay realizing capital losses, while realizing gains prematurely (Odean [1996], Shefrin and Statman [1985], Weber and Camerer [1996]). This tendency has been termed the "disposition effect." The disposition effect is inconsistent with normative approaches to stock sales, such as those based on tax losses (see, for example, Constantinides [1983]). We surveyed individual investors, and found that more respondents reported regret about holding on to a losing stock too long than about selling a winning stock too soon. This finding suggests that individual investors are consistently engaging in behavior that they have been warned can cost them money and that they regret later. Two additional experiments confirm the disposition effect and the role of regret, and offer evidence about the role of an agent (broker) in the assignment of blame and regret. We show that investor satisfaction and regret are not simply functions of outcome, but are influenced by counterfactual alternatives and the type of action taken (holding versus selling). We suggest that the disposition effect may be highly related to reduction of anticipated regret.

Research Elsewhere
Robert A. Olsen-California State University and Decision Science Research Institute in Eugene, Oregon

Book Reviews
Robert A. Olsen-California State University and Decision Science Research Institute in Eugene, Oregon