An Analysis of the Effect of Information Activism on Capital Markets: Investor Behavior and Divergent Market Conditions
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An Analysis of the Effect of Information Activism on Capital Markets: Investor Behavior and Divergent Market Conditions A dissertation submitted to the Kent State University Graduate School of Management in partial fulfillment of the requirements for the degree of Doctor of Philosophy by Laura K. Rickett May 2011 Dissertation written by Laura K. Rickett B.S.B.A., Bowling Green State University, 1989 M.B.A., The University of Akron, 1997 Ph.D., Kent State University, 2011 Approved by ______________________________ Chair, Doctoral Dissertation Committee Dr. Pratim Datta ______________________________ Members, Doctoral Dissertation Committee Dr. Alan Brandyberry ______________________________ Dr. Indrarini Laksmana ______________________________ Dr. Linda Zucca Accepted by ______________________________ Doctoral Director, Graduate School of Management Dr. Murali Shanker ______________________________ Dean, Graduate School of Management Dr. Frederick Schroath ACKNOWLEDGEMENTS I wish to thank the many people in my life who provided encouragement, support, and sacrifice in order to make the completion of this dissertation and the doctoral program possible. I would like to begin by thanking my dissertation chair, Dr. Pratim Datta, whom without his insight and encouragement, the conceptualization of this dissertation would have not been possible. He not only provided support and motivation throughout this process, but was a constant source of inspiration through his many achievements in research and otherwise. I also owe a deep gratitude to my dissertation committee members. As a committee member, Dr. Indrarini Laksmana was instrumental in providing key guidance in the methodological development. In addition, she provided essential feedback and challenges to greatly improve this dissertation. I also want to thank my other committee members Dr. Alan Brandyberry and Dr. Linda Zucca who also were extremely supportive and offered critical feedback on my drafts as well as crucial insight. I especially want to thank all my committee members for their overall dedication, sacrifice, and commitment in helping me to complete this dissertation in such a timely manner and often on tight schedules particularly given their other important obligations. I will forever be grateful to you all. I wish to also thank the friends and family members which are unfortunately too many to name. My friends and family who provided encouragement, helped with our children, or were just there to listen, I can’t thank you enough as you were instrumental in my completion of this dissertation and the doctoral program. In particular, I thank my husband Todd and our four amazing children, Ellie, Hanna, Grace, and Jake, whom without you I could not achieve anything. You all make my life so joyous and you are my greatest gifts. Todd, I thank you for your unwavering support, even when times were tough and also for the many sacrifices you have made to allow me to achieve this accomplishment. You, at times, do more than any Dad or Mom I know and I would not want to venture on this journey without you. Thanks to our children for their understanding when I was not there for them as much as I would like and for understanding at a young age the importance of sacrifice and commitment. Thanks especially to Jake who came into our life the first year of the Ph.D. program and although many thought it impossible to take on this challenge with a new baby, you always made me smile even when at times I felt discouraged. You and your sisters gave me the inspiration to keep pushing forward and to never give up. Finally, I want to thank my parents, James and Sherry, for instilling in me the value of hard work, dedication and believing in myself. They always taught me that you can achieve anything if you work hard enough and this is proof of that belief. I want to dedicate this dissertation to my late father who I know would be proud and I thank him and my mother for providing a good example of a strong work ethic and values. Above all else, I thank God who guides me each day and whom I call on constantly for strength and guidance and offer thanks for my many blessings. i TABLE OF CONTENTS CHAPTER 1 INTRODUCTION…………………………………………...………………...….... 1 1.1 Overview……………………………………………………………………………. 1 1.1.1 Case-in-Point………………………………………………………………………... 1 1.1.2 Demand and Growth of Infomediaries……………………………..……………….. 2 1.1.3 A Downside of Infomediation………………………………………………………. 3 1.1.4 Infomediaries: Two Sides of the Coin……………….…………………………….... 6 1.2 Information Activism Defined...…………………………………………………...... 7 1.2.1 Activism……………………………………………………………………………... 7 1.2.2 Activism in Accounting……………………………………………………………... 8 1.2.3 Reliance on Information Activists…………………………………………………... 9 1.2.4 Aspects of Information Activism…………………………………………………..... 9 1.3 Continued Motivation: Bridging the Information Divide………………………….... 10 1.3.1 Information: Beyond the Financial Statements…………………………………….. .. 10 1.3.2 Importance of Market Conditions………………………………………………….... 12 1.3.3 Sophisticated vs. Unsophisticated Investors……………………………………….... 13 1.3.4 A Changing Capital Market………………………………………………………..... 13 1.4 Research Objectives………………………………………………………………..... 14 1.4.1 Modus Operandi…………………………………………………………………...... 15 1.5 Contributions………………………………………………………………………... 16 CHAPTER 2 RELATED PRIOR LITERATURE & THEORETIAL FOUNDATION…….… 19 2.1 Signal Theory & Information Asymmetry………………………………….……...... 19 2.2 Shareholder Activism……………………………………………………….………. 20 2.3 Media Coverage……………………………………………………………………... 22 2.4 Investor Behavior……………………………………………………………………. 23 2.5 Information Intermediaries and Online Stock Recommendations…........................... 26 2.6 Risk & Loss Aversion……………………………………………………………...... 28 2.7 Literature Synopsis……………………………………………………….…….…… 29 ii CHAPTER 3 HYPOTHESES DEVELOPMENT & RESEARCH MODEL………….…........ 30 3.1 Investor Behavior………………………………………………………………....... 30 3.1.1 Price Reaction………………………………………….……………….………....... 32 3.1.2 Trading Volume………………………………………………………………..….... 33 3.1.3 Sentiment of Information Activism…………………………………………….…... 35 3.2 Moderating Effects………………………………………………………………..... 35 3.2.1 Investor Sophistication………….…………………………………………….…….. 36 3.2.2 Market Condition..………………………………………………………………...... 37 3.2.3 Information Asymmetry…………………………………………………………….. 38 3.2.4 Earnings Quality……………………………………………………………….….... 39 3.3 Research Model…………………………………………………………………....... 40 CHAPTER 4 RESEARCH DESIGN…………………………………………....…………….... ... 42 4.1 Sample Time Periods and Sample Selection………………………………………... 42 4.1.1 Sample Time Periods……………………………………………………………...... 42 4.1.2 Sample Selection…………………………………………………………………..... 43 4.1.3 Other Data Sources……………………………………………………………….. … 46 4.2 Sample Characteristics & Confounding Events…………………………………...... 47 4.2.1 Sample Characteristics…………………………………………………………….... 47 4.2.2 Confounding Events……………………………………………………………........ 47 4.3 Methodological Framework……………………………………………………….... 49 4.3.1 Cumulative Abnormal Return – Univariate Analysis…………………………...…... 49 4.3.2 Abnormal Trading Volume – Univariate Analysis………………………...……….. 51 4.3.3 Information Activism Sentiment – Univariate Analysis……………………...…….. 52 4.3.4 Moderating Effects – Univariate Analysis……………………………………....….. 52 4.3.5 Cross-sectional Regressions – Multivariate Analysis…………………………...….. 53 4.3.6 Regressions Functions and Variable Definitions………………………………........ 54 4.3.7 Earnings Quality………………………………………………………………...….. 59 iii CHAPTER 5 EMPIRICAL RESULTS………………………….…………………………..….. 62 5.1 Univariate Results…………………………………………………………….......... 6.2 5.1.1 Effect of Information Activism on Investor Behavior – Returns…………..……..... 62 5.1.1.1 Returns – Overall (H1a)…………………………………………………………..... 62 5.1.1.2 Returns – Sentiment (H1c)…………………………………………………………. 62 5.1.1.3 Returns – Investor Sophistication (H2)…………………………………………….. 63 5.1.1.4 Returns – Market Condition (H3)………………………………………………….. 65 5.1.1.5 Returns – Information Asymmetry (H4)………………………………………….... 66 5.1.1.6 Returns – Earnings Quality (H5)……………………………………………….….. 67 5.1.2 Effect of Information Activism on Investor Behavior – Trading Volume…….…... 67 5.1.2.1 Trading Volume – Overall (H1b)………………………………………………….. 67 5.1.2.2 Trading Volume – Investor Sophistication (H2)…………………………………... 68 5.1.2.3 Trading Volume – Market Condition (H3)…….………………………………….. 69 5.1.2.4 Trading Volume – Information Asymmetry (H4)…………………………………. 69 5.1.2.5 Trading Volume – Earnings Quality (H5)…………………………………………. 70 5.2 Multivariate Results………..……………………………………………………..... 71 5.2.1 Intensity…………………………………………………………………..………... 71 5.2.2 Sentiment……………………………………………………………………..……. 73 5.2.3 Moderating Effects……………………………………………………………...…. 75 5.2.4 Control Variables………………………………………………………………….. 77 5.2.5 Unexpected Results………………………………………………………………... 77 CHAPTER 6 SUMMARY & CONCLUSION, LIMITATIONS, & FUTURE RESEARCH... 80 6.1 Summary and Conclusion…………………………………………………….......... 80 6.1.1 Univariate Summary……………………………………………………………...... 81 6.1.2 Multivariate Summary……………………………………………………………... 82 6.2 Contributions…………………………………………………………………..…... 84 6.3 Limitations………………………………………………………………………..... 85 6.4 Future Research…………………………………………………………………..... 86 REFERNCES…………………………………………………………………………...……….... 93 iv LIST OF FIGURES Figure 1 Basic Model…………………………………………….…….. 88 Figure 2 Research Model……………………………………………… 88 Figure 3 Dow Jones Industrial Average……………………………… 89 Figure 4 Average Monthly Returns Bull/Bear Periods……………… 90 Figure 5 Summary of Hypotheses & Findings……………………….