Are Investors Ever Rational?

43 Pages Posted: 6 Mar 2014

See all articles by Saptarshi Mukherjee

Saptarshi Mukherjee

New York University Stern School of Business; Northeastern University

Sankar De

Independent

Date Written: March 4, 2014

Abstract

Behavioral biases like disposition effect and overconfidence have received much attention as a potential driver of numerous anomalies observed in the markets. Also, it has been argued that information uncertainty tends to exacerbate these biases and induce stronger irrational behavior among investors. Using a unique investor-level database, this paper examines whether and how pertinent information impacts behavioral biases. We document that disposition effect in stocks is lower following high-degree of private information based trading during days preceding quarterly earnings announcements. Also, consistent with theoretical predictions, we find price discovery to be faster in stocks with lower disposition effect. Finally, we find that higher pre-announcement information asymmetry and disclosure noise increases disposition effect in the post-announcement period.

Keywords: Private Information, Information Asymmetry, Disposition Effect, Post-Earnings Announcement Drift

JEL Classification: D81, D82, D83, G11, G12, G14

Suggested Citation

Mukherjee, Saptarshi and De, Sankar, Are Investors Ever Rational? (March 4, 2014). Available at SSRN: https://ssrn.com/abstract=2404474 or http://dx.doi.org/10.2139/ssrn.2404474

Saptarshi Mukherjee (Contact Author)

New York University Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Northeastern University ( email )

Boston, MA 02115
United States

Sankar De

Independent ( email )

Villa 286 bTR
Srisalam Highway
Hyderabad, Telengana
+91 7042662505 (Phone)

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