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Do foreign investors mitigate anchoring bias in stock market? Evidence based on post-earnings announcement drift

Title
Do foreign investors mitigate anchoring bias in stock market? Evidence based on post-earnings announcement drift
Authors
Shin, HeejeongPark, Sorah
Ewha Authors
박소라
SCOPUS Author ID
박소라scopus
Issue Date
2018
Journal Title
PACIFIC-BASIN FINANCE JOURNAL
ISSN
0927-538XJCR Link1879-0585JCR Link
Citation
vol. 48, pp. 224 - 240
Keywords
Foreign investorsPost-earnings announcement driftAnchoring bias52-week high priceMarket inefficiency
Publisher
ELSEVIER SCIENCE BV
Indexed
SSCI; SCOPUS WOS scopus
Abstract
In this paper, we examine the role of foreign investors in the anchoring bias of stock markets. While the existing behavioral finance literature is mostly based on established capital markets like U.S. and U.K., this paper focuses on emerging economy in which foreign investors are important stockholders. Using a sample of common stocks listed on the Korea Stock Exchange between 2001 and 2014, we document the following empirical results. First, the nearness of current price to the 52-week high is positively related to the magnitude of post-earnings announcement drift (PEAD). This indicates that investors are hesitant to revise their beliefs upward (downward) when positive (negative) surprises arrive if the price is already near (far below) its 52-week high, on average. More important, the positive relation between the price proximity to the 52-week high and PEAD disappears for stocks with high level of foreign investor ownership, suggesting that anchoring effect of stocks' 52-week high prices is mitigated by foreign investors. Also, dedicated foreign institutions play an important role in mitigating the extent of PEAD due to anchoring bias. These findings add new evidence to the literature that sophisticated foreign investors reduce market anomaly because they are less subject to cognitive bias such as anchoring on 52-week high stock price in forming earnings expectations.
DOI
10.1016/j.pacfin.2018.02.008
Appears in Collections:
경영대학 > 경영학전공 > Journal papers
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