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Do Investors’ Cultural Traits Affect How They Process Information?

AUTHORS

Kevin Brady

Luis Garcia-Feijoo

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DISCUSSANT

Boone Bowles

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Big Picture

  • “We examine how publicly available information (PAI) affects stock returns using an international sample of equities experiencing large price changes” - Abstract

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  • Classifies large price movements as those that are accompanied by analyst reports and those that are not. - Savor (2012)

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Three Hypotheses

  1. Does PAI affect price movements over/under reaction internationally?
      • Out of sample test of Savor (2012).

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  • Is the effect of PAI the same across all countries?

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  • How do cultural traits influence the effect of PAI?
      • Trust
      • Risk Tolerance
      • Overconfidence

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Hypothesis 1

Does PAI affect price movements over/under reaction internationally?

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  • Yes!

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    • Investors overreact to shocks…

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    • … but not as much when the shock is accompanied by information.

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Hypothesis 2

Is the effect of PAI the same across all countries?

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  • No!

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    • For negative shocks…
      • …12 countries move from inefficient to efficient pricing with PAI.
      • …2 countries move from efficient to inefficient pricing with PAI.

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    • For positive shocks…
      • …17 countries move from inefficient to efficient pricing with PAI.
      • …4 countries move from efficient to inefficient pricing with PAI.

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Hypotheses 3, 4, 5

How do cultural traits influence the effect of PAI?

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    • Less overreaction to shocks with PAI in high trust countries.

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    • Less overreaction to shocks with PAI in countries with less risk tolerance.

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    • Investors’ overconfidence matters.
      • Less overreaction to negative shocks with PAI in high overconfidence countries.
      • More overreaction to positive shocks with PAI in high overconfidence countries.

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3 Points

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        • 37% of the observations come from 2000-2001 or 2008-2009.

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3 Points

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        • 37% of the observations come from 2000-2001 or 2008-2009.
      • Do the tests hold when these years are withheld?

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        • PAI improves pricing efficiency in many countries, but worsens it in a few.

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Hypothesis 2

Is the effect of PAI the same across all countries?

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  • No!

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    • For negative shocks…
      • …12 countries move from inefficient to efficient pricing with PAI.
      • …2 countries move from efficient to inefficient pricing with PAI.

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    • For positive shocks…
      • …17 countries move from inefficient to efficient pricing with PAI.
      • …4 countries move from efficient to inefficient pricing with PAI.

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3 Points

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        • 37% of the observations come from 2000-2001 or 2008-2009.
      • Do the tests hold when these years are withheld?

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        • PAI improves pricing efficiency in many countries, but worsens it in a few.
      • Can you group these countries and give us a bit more detail before jumping to the traits tests?
      • Why not include the U.S. in these tests?

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  1. What about disagreement and PAI?
      • There is a shock accompanied by PAI, but analyst disagreement is high, how does PAI influence subsequent returns?