Three Essays In Behavioral Finance
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In Chapter 1, we study the trading pattern of rich individual investors. To the contrary of the current literature that individual investors trade excessively, and that trading is hazardous to their wealth, we find that in the Chinese stock market, individual investors with stock holdings over 5 million RMB benefit from trading. Our results show that these super rich individual investors trade far more extensively than the market average. Yet they manage to beat the performance of the market portfolio in China by a large margin. Further investigation attributes their persistent excess returns to informational advantages. We find evidence that they trade against behavioral investors around good news announcements. In Chapter 2, we study a puzzling phenomenon in the Chinese stock market, that is a stock's price and its trading volume rise significantly after public news, unrelated to a concrete change in the firm's value. We propose a model of trade-based manipulation to explain this phenomenon. In this model, a large number of speculative manipulators coordinate implicitly after public news events to exploit investors with behavioral biases. We provide empirical evidence that is consistent with the prediction of the model. Stocks that have low institutional investor holdings or that have experienced a recent decline in value are more likely to be manipulated. Manipulated stocks experience price reversals after the manipulation. We suspect that speculative manipulators are investors with more than five million RMB in stocks' value. These investors accumulate shares to pump up the stock price initially and then dump them after the significant increase in price. Their accounts also realize abnormally high returns during the event days. In Chapter 3, we study the cross-sectional differences in IPO pricing under sentiment and disagreement influences in the Chinese stock market. We find that the first-day returns of IPOs are positively related to market sentiment and disagreement over their offer prices. Hard-to-value IPO stocks earn higher first-day returns when investor sentiment is higher. Issuers in the Chinese stock market are not able to time the market for regulatory reasons, making our results less affected by the endogenous issue between market sentiment and IPO underpricing observed in the US market. A unique data set containing analysts' forecasts about IPO offer prices allows us to measure the disagreement over the IPO valuations directly, which is also not available for the US market.
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