Asset Pricing, Real Estate and Public Finance over the Crisis

A. Carretta, G. Mattarocci, A. Carretta, G. Mattarocci

• Publisher: Palgrave Macmillan
• Year: 2013
• ISBN:
  9781137293770
• Topic: Business
• Subtopic: Project Management
• Index: Business

The current financial crisis started from the US real estate market and after, though the increase of risk premium requested by investors and due to the lack of liquidity of all financial markets, it became a world financial crisis. A detailed analysis during the crisis focuses attention on asset management, the real estate and public sector.

Part I

Asset Pricing during the Crisis

1

Does Investor Attention Influence Stock Market Activity? The Case of Spin-Off Deals

Alessandro Carretta, Vincenzo Farina, Elvira Anna Graziano and Marco Reale

1.1 Introduction

One of the most important research streams in finance is to understand the determinants of stock market dynamics. According to the theory of efficient financial markets (Fama, 1970), stock prices should reflect all available information. However, the evidence of an autocorrelation of stock returns at short horizons (Jegadeesh and Titman, 1993; Moskowitz and Grinblatt, 1999; Hong et al., 2007) suggests that that stock prices do not fully adjust to new information.

In recent times, a number of studies have been conducted to explain stock market underreaction/overreaction to new information. In particular, these models rely on underreaction due to investor sentiment and conservatism when adjusting beliefs (Barberis et al., 1998), variations in investor confidence arising from biased self-attribution (Daniel et al., 1998) and slow information diffusion (Hong and Stein, 1999).

The only way to test these models is to consider market sentiment as a measure of investor expectation about future stock returns and attention allocation as a proxy for either investors’ cognitive biases or information diffusion.

In this regard, market sentiment is made up by different sources of information: press releases, analysts’ comments and mass media are just a few examples. An intriguing literature provides interesting evidence of the impact of these different sources on various stock market variables, such as returns, trading volumes, and price volatility (Dell’Acqua et al., 2010; Doukas et al., 2005; Antweiler and Frank, 2004; Coval and Shumway, 2001).

Dell’Acqua et al. (2010) find evidence that voluntary disclosure following the introduction of the Regulation Fair Disclosure, included in the Selective Disclosure and Insider Trading Act issued by the SEC, reduces price volatility of high-tech firms listed in the US market. Doukas et al. (2005) find that positive excess analyst coverage, raising investors’ optimism, is associated with overvaluation and low future returns. Antweiler and Frank (2004) find evidence of a relationship between message activity and both trading volume and return volatility. Similarly, Coval and Shumway (2001) establish that the ambient noise level created by traders in a futures pit is linked to volume and volatility, but not to returns. In addition, Tetlock et al. (2008) find that some news exerts an effect in a relatively short period and other news in the medium and long term (for example, news regarding core aspects of firm management).

As shown by various cognitive studies (Baumeister et al., 2001; Rozin and Royzman, 2001; Fiske and Taylor, 1991; Brief and Motowidlo, 1986), positive and negative news have different impacts on people’s perceptions, and negative news also exerts a stronger impact than positive news. Moreover the emotion aroused by news is likely to influence investors’ behaviour (Carretta et al., 2011). Shoemaker and Reese (1996) argue that newspapers generally tend to put a certain emphasis in the news in order to make it more engaging to the public. As a consequence, financial journalists may tend to ‘dramatize’ corporate events in order to make their articles more interesting for the public of investors.

Theoretically, one could expect a variation in stock market activity as a consequence of a shock in the levels of attention (Daniel et al., 1998; Hong and Stein, 1999). Various empirical studies document this impact (Chemmanur and Yan, 2009; Da et al., 2009; DellaVigna and Pollet, 2009; Barber and Odean, 2008;Cohen and Frazzini, 2008;Peng et al., 2007;Fehle et al., 2005; Huberman and Regev, 2001).

Chemmanur and Yan (2009) find that an increased level of investor attention is associated with a larger contemporary stock return and a smaller future stock return. Da et al. (2009) find investor attention to be correlated with the large first-day return and the long-run underperformance of IPO stocks.

DellaVigna and Pollet (2009) compare the response of stock returns to earnings announcements on Friday, when investors are more likely to be inattentive, and on other weekdays. They find that the volume reaction and two-day stock price reaction to news that is released to the media on Fridays are much weaker than when news is released on other days of the week. Barber and Odean (2008) test and confirm the hypothesis that individual investors are net buyers of attention-grabbing stocks, e.g., stocks in the news, stocks experiencing high abnormal trading volume, and stocks with extreme one-day returns. Therefore individual investors are more prone to search for information when they are buying since they have to choose from a large set of available alternatives.

Cohen and Frazzini (2008) put in evidence that in the presence of investors subject to attention constraints, stock prices do not promptly incorporate news about economically related firms. Peng et al. (2007) find support for the hypothesis that investors shift their (limited) attention to processing market-level information following an increase in market-wide uncertainty and then subsequently divert their attention back to asset-specific information. Fehle et al. (2005) examine whether companies can create attention effects through advertising. Investigating stock price reactions and trading activity for firms employing TV commercials in 19 Super Bowl broadcasts over the period 1969–2001, they find significant positive abnormal returns for firms which are readily identifiable from the contents.

Huberman and Regev (2001) compare the effect of an information diffuse by the popular New York Times versus the effect of the same information diffuse by the journal Nature and by various popular newspapers (including The Times) more than five months earlier. Results show that newspaper content can affect stock prices even if the content does not provide genuine information thus confirming the important role exercised by investor attention.

This chapter aims to test whether and how market sentiment (arising from mass media) and investor attention play a role in influencing the performance of spin-off deals, back in fashion due to the recent financial crisis. We use data from a sample of 16 spin-off deals published between 2004 and 2010 in the Wall Street Journal, the US’s second-largest newspaper by circulation. In detail, we expect that media sentiment and investor attention will influence investor reaction around the date of various spin-off deals and on the subsequent days.

From a theoretical point of view, we broaden the literature on stock market reaction to spin-off deals. Firms on the world’s stock markets have spun off bits of themselves as separate listed companies worth a total of $54 billion in all of 2010 (source: Economist, 2011). One of the main reasons for the starburst is that companies seeking buyers for parts of their business are not getting good offers from other firms, or from private equity. Another driving force is the ‘conglomerate discount’ when stock markets value a diversified group at less than the sum of its parts.

Existing studies on this topic consider investor reaction and performance in relation to (Chemmanur et al., 2010; Veld and Veld-Merkoulova, 2009; Chemmanur and Yan, 2004; Veld and Veld-Merkoulova, 2004; Desai and Jain, 1999;Daley et al., 1997;Cusatis et al., 1993;Rosenfeld, 1984;Schipper and Smith, 1983;Miles and Rosenfeld, 1983;Hite and Owers, 1983): (i) spinoff size, (ii) improvement of industrial focus, (iii) information asymmetry, (iv) regulatory and tax advantages, (v) anti-takeover provisions.

From a methodological point of view, we consider mass media content as a measure of investor expectation about future stock returns and attention allocation as a proxy for either investor cognitive biases or information diffusion.

Moreover, we define a direct measure of investor attention using data from Google Insights for Search. Since internet users commonly use a search engine to collect information, aggregate search frequency in this search engine could be considered a direct and unambiguous measure of attention (Da et al., 2011).

Finally, we examine the statistical relation between investors’ attention and stock market variables using a dynamic model built as a sparse structural vector autoregression (SVAR) and adopting an approach based on graphical modelling (Reale and Tunnicliffe Wilson, 2001).

The rest of this chapter is organized as follows. In the next section we present data and variables. Section 1.3 lays out methods and estimation results. Finally, Section 1.4 concludes.

1.2 Data and variables

Our sample includes 16 spin-off deals (Table 1.1) traded on the New York Stock Exchange (NYSE) and published between 2004 and 2010 in the Wall Street Journal, the US’s second-largest newspaper by circulation (according to Editor & Publisher, in 2010 it reported a circulation of just over two million weekday copies).

1.2.1 Media sentiment

We define media sentiment as the degree to which Wall Street Journal news regarding each spin-off f...

Table of contents

• Cover
• Title Page
• Copyright Page
• Contents
• List of Figures
• List of Tables
• Preface
• Acknowledgements
• Notes on Contributors
• Abbreviations
• Introduction
• Part I Asset Pricing during the Crisis
• Part II Real Estate Investment Vehicles and Markets during the Crisis
• Part III Public Sector Issues in a Crisis Scenario
• Index