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Hard-to-Value Stocks, Behavioral Biases, and Informed Trading

Published online by Cambridge University Press:  08 October 2009

Alok Kumar
Alok Kumar*
Affiliation:
McCombs School of Business, University of Texas at Austin, 1 University Station, B6600, Austin, TX 78712. [email protected]
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Abstract

This paper uses investor-level data to provide direct evidence for an intuitive but surprisingly untested proposition that investors make larger investment mistakes when valuation uncertainty is higher and stocks are more difficult to value. Using multiple measures of valuation uncertainty and multiple behavioral bias proxies, I show that individual investors exhibit stronger behavioral biases when stocks are harder to value and when market-level uncertainty is higher. I also find that informed trading intensity is higher among stocks where individual investors exhibit stronger behavioral biases. Collectively, these results indicate that uncertainty at both stock and market levels amplifies individual investors’ behavioral biases and that relatively better informed investors attempt to exploit those biases.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 6 , December 2009 , pp. 1375 - 1401
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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