Abstract
This study applies an event study to examine the stock price reactions and trading activities of informational stakeholders associated with changes in stock recommendations made by foreign institutional investors (FIIs) in Taiwan. The empirical results indicate that, when FIIs (i.e., stock recommenders) face a conflict between their reputations and self-interest, they choose to make optimal profits at the expense of their reputations. A significant disposition effect exists in the trading behavior of experienced retail investors (i.e., one of the recommendation information receivers) concerning stock recommendation changes. Furthermore, the findings confirm that FIIs regularly attempt to exploit the disposition effect of experienced retail investors to enhance their own profitability.
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Notes
In Taiwan, FIIs send stock recommendation information to the market, and experienced retail investors receive stock recommendation information. Following Chang and Chan (2011), this study defines experienced retail investors in the Taiwanese stock market as those engaging in margin buying.
According to the annual statistic data of Taiwan Stock Exchange Corporation, in December 2012, FIIs and domestic institutional investors (including investment trust corporations and dealers) accounted for 10.72 and 7.67 % of the trading volume in the Taiwanese stock market, respectively.
In this situation, although FIIs try to maintain their good reputation, their self-interest would take a hit.
In Taiwan’s stock market, institutional investors are not allowed to engage in margin buying.
Following the suggestion of Chang and Chan (2011), the effect of stock recommendation changes on stock returns is viewed as the behavioral reaction of aggregate investors to stock recommendation changes.
CAR i,t,t + h is the cumulative abnormal returns on recommended stock i during the period from day t to day t + h (Note: \( CA{R}_{i,t,t+h}={\displaystyle \sum_{T=t}^{t+h}A{R}_{i,T}} \); \( AA{R}_t={\displaystyle \sum_{i=1}^nA{R}_{i,t}}/n \); \( CAA{R}_{t,t+h}={\displaystyle \sum_{i=1}^nCA{R}_{i,t,t+h}}/n \) or \( CAA{R}_{t,t+h}={\displaystyle \sum_{T=t}^{t+h} AA{R}_T} \)). CAD i,t,t + h is the cumulative abnormal differences of FIIs on recommended stock i during the period from day t to day t + h (Note: \( CA{D}_{i,t,t+h}={\displaystyle \sum_{T=t}^{t+h}A{D}_{i,T}} \); \( AA{D}_t={\displaystyle \sum_{i=1}^nA{D}_{i,t}}/n \); \( CAA{D}_{t,t+h}={\displaystyle \sum_{i=1}^nCA{D}_{i,t,t+h}}/n \) or \( CAA{D}_{t,t+h}={\displaystyle \sum_{T=t}^{t+h} AA{D}_T} \)). CAC i,t,t + h is the cumulative abnormal changes in margin purchases on recommended stock i during the period from day t to day t + h (Note: \( CA{C}_{i,t,t+h}={\displaystyle \sum_{T=t}^{t+h}A{C}_{i,T}} \); \( AA{C}_t={\displaystyle \sum_{i=1}^nA{C}_{i,t}}/n \); \( CAA{C}_{t,t+h}={\displaystyle \sum_{i=1}^nCA{C}_{i,t,t+h}}/n \) or \( CAA{C}_{t,t+h}={\displaystyle \sum_{T=t}^{t+h} AA{C}_T} \)).
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Acknowledgments
Chang thanks Ministry of Science and Technology of R.O.C. for the financial support (project number: MOST94-2416-H-390-013-).
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Chang, CH. Exploring stock recommenders’ behavior and recommendation receivers’ sophistication. J Econ Finan 41, 1–26 (2017). https://doi.org/10.1007/s12197-015-9330-x
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DOI: https://doi.org/10.1007/s12197-015-9330-x
Keywords
- Stock recommendations
- Disposition effect
- Foreign institutional investors (FIIs)
- Experienced retail investors