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

Heejeong Shin, Sorah Park

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

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.

Original languageEnglish
Pages (from-to)224-240
Number of pages17
JournalPacific Basin Finance Journal
Volume48
DOIs
StatePublished - Apr 2018

Keywords

  • 52-week high price
  • Anchoring bias
  • Foreign investors
  • Market inefficiency
  • Post-earnings announcement drift

Fingerprint

Dive into the research topics of 'Do foreign investors mitigate anchoring bias in stock market? Evidence based on post-earnings announcement drift'. Together they form a unique fingerprint.

Cite this