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Investor Behavior and Information

Published online by Cambridge University Press:  19 October 2009

Joseph K. Winsen
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Investor behavior was measured on a firm-by-firm basis by the volume of transactions in the stock of a firm. While data on an individual investor by individual investor basis would be desirable, it is not as readily available as stock volume data. Volume represents a simple summation of individual actions and can be considered at least a partial disaggregation of stock-market activity.

The reasons for individual investor action were considered to be (1) a change in trade-off between risk and return, (2) the unfolding of time-dependen consumption plans, and (3) perception of information that changes expectations. It was argued that, in general, the first reason can be ignored, occurring at discrete and probably lonq intervals, and that the second reason is unlikely to have an effect over a few years on the total volume of transactions in the stock of a given firm. Thus, fluctuations in such volume were considered to reflect perception of information about the given firm by investors in that firm.

Market behavior was analyzed in terms of general market movements and market movements specific to the firm. Market-wide effects on both price changes and volume of transactions.in the stock of a given firm were filtered out. This left price changes indicating the flow of, and volume indicating a reaction to, information unique to the given firm.

Perception of information about a given firm by investors, measured as indicated above, was then examined for association with the flow of information coming onto the market as indicated by fluctuations in the price of the stock of the firm net of market-wide effects. The percentage of volume of transactions in the stock of a given firm that was explained by fluctuations in the stock price was taken as a measure of the efficiency of investor behavior with respect to the given firm. The validity of accepting this interpretation is based on the following assumptions: (1) the probability that investors' demands for a given stock continually exactly offset each other in such a manner that volume occurs without price change is negligible, (2) specialists in securities are unable to perfectly anticipate changes in market demand in such a manner that price changes occur without volume.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 11 , Issue 1 , March 1976 , pp. 13 - 37
Copyright
Copyright © School of Business Administration, University of Washington 1976

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Footnotes

*

University of California, Berkeley.

References

1 Beaver, W., “The Behavior of Security Prices and Its Implications for Accounting Research (Methods),” The Accounting Review (supplement to vol. 47, 1972), p. 408.Google Scholar

2 Objectives of Financial Statements for Business Enterprises (Arthur Anderson & Co., 1972), pp. 85–86. Emphasis added.Google Scholar

3 Crouch, R., “The Volume of Transactions and Price Chancres on The New York Stock Exchange,” The Financial Analysts Journal (July–August 1970).CrossRefGoogle Scholar

4 It is also possible to consider a third argument in the function, changes in expectations due to industry-wide events. It has been reported that this third argument has become of decreasing importance as an explanatory variable. Ball and Brown, and Fama et al. reported that ignoring the industry factor was not a serious omission.

Ball, R. and Brown, P., “An Empirical Evaluation of Accounting Income Numbers,” Journal of Accounting Research (Autumn 1968).CrossRefGoogle Scholar

Fama, E. et al. , “The Adjustment of Stock Prices to New Information,” International Economic Review (February 1969).CrossRefGoogle Scholar

Generally, on this view of price behavior, see King, B., “Market and Industry Factors in Stock Price Behavior,” The Journal of Business (January 1966).CrossRefGoogle Scholar

5 Beaver, W., “The Information Content of Annual Earnings Announcements,” Empirical Research in Accounting (1968).CrossRefGoogle Scholar

6 Fama, Fisher, Jensen, and Roll reported that data supported a linear hypothesis for the form of this function. E. Fama et al., “The Adjustment of Stock Prices to New Information.”

7 B. King, “Market and Industry Factors,” pp. 161–63.

8 Fisher, L., “Some New Stock Market Indices,” The Journal of Business (January 1966), pp. 206–207.Google Scholar

The estimate of Kendall's rank correlation between these series is .89, and Kendall's test of independence between the series rejects the null at the .001 level of significance (two-tail test).

9 The conditions require continuity of the joint and marginal density functions; see Hoeffding, W., “A Non-parametric Test of Independence,” The Annals of Mathematical Statistics, vol. 19.Google Scholar Hoeffding's statistic estimates E(h2), where E is the expectation operator and h is as defined above.

10 W. Beaver, “The Behavior of Security Prices and Its Implications for Accounting Research (Methods),” pp. 422–23.

11 Sterling, R., “A Test of the Uniformity Hypothesis,” ABACUS (September 1969).CrossRefGoogle Scholar

12 Fisher's transform that provides a statistic which has an asymptotically normal distribution, if Pearson's product-moment sample correlation coefficient is used, cannot be taken advantage of since the measures of dependence in this case are themselves dependent. For the appropriate parametric tests see Dunn, O. and Clark, V., “Comparison of Tests of the Equality of Dependent Correlation Coefficients,” J.A.S.A. (December 1971).CrossRefGoogle Scholar

13 I am indebted to Professor D. Wolfe for allowing access to his research and for his advice. Any statistical errors which remain in this study are, of course, my own.

14 Hollander, M. and Wolfe, D., Nonparametric Statistical Methods (New York: John Wiley & Sons, Inc., 1973), Ch. 9.Google Scholar

15 Fama, E., “The Behavior of Stock Market Prices,” The Journal of Business (January 1965).CrossRefGoogle Scholar

16 Fama et al., “The Adjustment of Stock Prices to New Information.”

17 For a discussion of the stationarity of monthly data, see Meyers, S., “The Stationarity Problem in the Use of the Market Model of Security Price Behavior,” The Accounting Review (April 1973).Google Scholar

18 Watts, R., “The Information Content of Dividends,” The Journal of Business (April 1973), Table 6, p. 204.Google Scholar

19 Fama, et al., “The Adjustment of Stock Prices to New Information,” Table 1, p. 5.

20 B. King, Table 5, p. 177.

21 In each of the runs tests conducted in this study the level of significance is .05.

22 See, for example:

Archibald, T., “Stock Market Reaction to the Depreciation Switch-Back,” The Accounting Review (January 1972).Google Scholar

Ball, R., “Changes in Accounting Techniques and Stock Prices,” Empirical Research in Accounting (1972).CrossRefGoogle Scholar

Kaplan, R. and Roll, R., “Investor Evaluation of Accounting Information Some Empirical Evidence,” Journal of Business (April 1972).CrossRefGoogle Scholar

23 Objectives of Financial Statements (A.I.C.P.A., 1973), p. 62.

24 Murray, R., “Let's Not Blame the Institutions,” Financial Analysts Journal (March/April 1974), p. 20.Google Scholar

25 McDonald, J., “Discussion (of ‘The Individual Investor: Attributes and Attitudes’)” The Journal of Finance (May 1974).Google Scholar

26 Such a study has been undertaken. See Winsen, J. and Ng, D., “Investor Behavior and Changes in Accounting Methods,” manuscript, University of California, Berkeley (1974).Google Scholar