Faculty, Research & Teaching
Are financial markets rational and efficient as is often pronounced? Matteo Arena, assistant professor of finance, and colleague John S. Howe of the University of Missouri examined one aspect of that theory in a research article titled “A Face Can Launch a Thousand Shares (and a 0.80% Abnormal Return)” published in the Journal of Behavioral Finance.
Professor Arena and his colleague, Professor Howe, examined the suggestion that in some circumstances financial investors choose stocks based on psychological biases and familiarity instead of rational strategies such as hedging and diversification. Their study analyzed the stock market reaction to the appearance of a picture of an executive in the Who’s News column of the Wall Street Journal (WSJ). That column features a picture of a top corporate manager who is the focus of one of the articles. Since the presence of a picture increases the familiarity that individual investors perceive regarding a particular stock but provides no information, this study provides an opportunity to analyze the impact of noninformation-based familiarity on investment decisions.
Arena and Howe discovered that firms that are the subject of a Who’s News article with a picture enjoy positive and significant abnormal short-horizon returns and abnormal trading activity around the article date when compared to firms that are covered by Who’s News articles without a picture. The results support the presence of psychological biases in investment decisions. In short, as Professor Arena noted, “(t)he main contribution of the paper is that it shows that investment decisions are not always rational. In some circumstances a psychological bias such as familiarity can drive financial asset allocations.”