Re: "Disagreement, retail trading, and anomalous stock returns around technology firms' earnings announcements" -- a study derived from posts on SI
The following report comes from the FMA:
The Financial Management Association International (FMA) was established in 1970 and has become the global leader in developing and disseminating knowledge about financial decision making. FMA's members include academicians and practitioners across the world. fma.org
Each year, the FMA has an annual conference at which a variety of academics present their research papers. The 2004 conference was held in New Orleans last October. fma.org
One such paper submitted was:
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"Disagreement, retail trading, and anomalous stock returns around technology firms' earnings announcements"
Henk Berkman, University of Auckland
Paul D Koch, University of Kansas
Discussant Sorin Sorescu, Texas A&M Univ
Abstract
This study tests Miller’s (1977) hypothesis as an explanation for stock price behavior around technology firms’ earnings announcements during the late 1990s. For a sample of high-tech stocks in 1998, we use the daily number of messages posted on a firm’s Internet message board (chat room) as a measure of investor disagreement. Consistent with Miller, we find that stocks with a larger increase in the level of disagreement before the announcement tend to have a larger pre-announcement price increase, and a larger price reversal after the announcement. In addition, our disagreement measure is directly related to net initiated order flow from retail investors, but not institutional investors. This result is consistent with the view that retail investors are less willing or able to short sell than institutional investors, and that information events attract the temporary attention of retail investors more than institutional investors.
207.36.165.114
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Sample quotes:
For a sample of 206 technology firms during 1998, we obtain data on the daily amount of chat activity from www.siliconinvestor.com, a major message board specializing in technology stocks.
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Our sample selection is based on the acquisition of chat data from www.siliconinvestor.com, one of the four major investor message boards (the others are Yahoo, the Motley Fool and Raging Bull). This web site focuses on technology companies and, unlike other chat-room sites, charged users a fee for posting messages during this sample period (there was no charge for reading messages on this site). For 331 technology ompanies, we obtained the daily number of messages posted on their message boards during 1998. While this sample includes several large firms aggressively followed by financial analysts, it is mostly comprised of smaller technology companies.14 Our measure of chat activity for firm i on day t (Chatit) is the number of messages posted over the 24-hour period from the previous day’s market close to the current day’s market close (4:00p.m. to 4:00p.m. E.S.T.). We exclude firms that average less than two chat messages per day.15
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6. Summary and conclusions
This paper proposes that the anomalous patterns in stock prices and net initiated order flow, around the earnings announcements of technology stocks during the late 1990s, are related to changes in the level of disagreement among investors before and after the announcements. We further conjecture that, in this setting, disagreement is likely to affect buying pressure of retail investors more than buying pressure of institutional investors, and that the anomalous patterns are stronger for stocks with a relatively high proportion of retail trading activity. This conjecture is based on the view that: (i) earnings announcements temporarily increase the attention of retail investors to a greater extent than institutional investors, and (ii) retail investors are less able or willing to short sell than are institutional investors.
We conduct three cross-sectional tests to investigate these hypotheses, using a proxy for the level of disagreement among investors based on the number of messages posted on the Internet message boards (chat rooms) of a sample of technology firms during 1998. First, we find that stocks with a larger increase in the level of disagreement before the earnings announcement tend to have a larger pre-announcement price increase, and a larger price reversal after the announcement. Second, we find that disagreement (proxied by abnormal chat activity) is directly related to net initiated order flow by retail investors, but tends to be negatively associated with net initiated order flow by institutional investors. Finally, we find the magnitude of the pre-announcement price run-up and the post-announcement reversal is directly related to the relative amount of retail versus institutional trading volume in a firm’s stock, and that the relation between stock returns and the change in disagreement is only significant for the subsample of stocks with the highest proportion of retail trading volume.
This paper helps to explain a recent stock price anomaly. Overall, our results show that changes in disagreement can have a substantial short term impact on price levels, especially for stocks with a high proportion of retail trading. These results suggest several avenues for future research. First, since our sample is comprised of mostly small technology firms during the technology boom of the late 1990’s, there is a need for similar research using a broader sample of companies over a longer time period. It may also be fruitful to study the impact of investor disagreement on the price formation process on an intra-day basis. Finally, this study has implications for related research that focuses on the potential pricing impact of trading by individual investors with respect to short-run stock price anomalies.
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Information on the next annual conference:
The Thirty-Fourth Annual Meeting of the Financial Management Association International (FMA) will be held October 12-15, 2005, at the Hyatt Regency Hotel in Chicago, Illinois. FMA’s Annual Meeting brings together academicians and practitioners with interests in financial decision-making. The meeting provides a forum for presenting new research and discussing current issues in financial management and related topics. fma.org
Plenty of time to get your papers accepted to it!
- Jeff |
