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Market Efficiency and Market Anomalies: Three Essays Investigating the Opinions and Behavior of Finance Professors Both As Resea Florida State University Libraries Electronic Theses, Treatises and Dissertations The Graduate School 2007 Market Efficiency and Market Anomalies: Three Essays Investigating the Opinions and Behavior of Finance Professors Both as Researchers and as Investors Colbrin (Colby) A. Wright Follow this and additional works at the FSU Digital Library. For more information, please contact [email protected] THE FLORIDA STATE UNIVERSITY COLLEGE OF BUSINESS MARKET EFFICIENCY AND MARKET ANOMALIES: THREE ESSAYS INVESTIGATING THE OPINIONS AND BEHAVIOR OF FINANCE PROFESSORS BOTH AS RESEARCHERS AND AS INVESTORS By COLBRIN (COLBY) A. WRIGHT A Dissertation submitted to the Department of Finance in partial fulfillment of the requirements for the degree of Doctor of Philosophy Degree Awarded: Summer Semester, 2007 The members of the Committee approve the dissertation of Colbrin A. Wright defended on May 22, 2007. _____________________________ David Peterson Professor Directing Dissertation _____________________________ Michael Brady Outside Committee Member _____________________________ Gary Benesh Committee Member _____________________________ James Doran Committee Member Approved: _________________________________ William Christiansen, Chair, Department of Finance _________________________________ Caryn L. Beck-Dudley, Dean, College of Business The Office of Graduate Studies has verified and approved the above named committee members. ii To my wonderful wife, Misty, whose unremunerated and oft-times unrecognized work as a mother is both unequivocally more challenging and infinitely more important than any of my professional accomplishments. Thanks for being my rock when the winds and rains have beat upon me. iii ACKNOWLEDGEMENTS No great work in life is ever accomplished alone. While readily acknowledging that my dissertation is no “great work,” I would like to gratefully acknowledge the many individuals who have improved the quality of this dissertation and influenced me along the way. First, thanks to my dissertation chair, Dr. David Peterson, who was mercilessly forced to read literally hundreds of pages of my writing. His questions, candor, direction, and suggestions have been invaluable. He, more than anyone else, has taught me how to be a researcher. Also, I sincerely thank each of the other members of my dissertation committee. Dr. Gary Benesh provided the voice of reason and experience. His candid feedback on the survey instrument and on the volume of work I initially proposed proved invaluable and prophetic. Dr. Mike Brady has been my brightly burning torch in an otherwise dark room as I constructed, distributed, and analyzed the responses to the survey. Dr. James Doran became my reason to keep working. On the days of frustration and disappointment, which accompany all dissertations, he was the optimistic cheerleader and demanding coach pushing me to keep going. His suggestions tremendously improved the quality of the work. I also want to thank Dr. Bill Christiansen whose instruction, mentoring, advice, and friendship have meant more to me than he will ever know. In addition to those mentioned above, I wish to thank the following individuals for their insightful suggestions, questions, and interest in my work: Prithviraj Banerjee, Jim Brau, Ronnie Clayton, Dean Diavatopolous, Michael Ehrhardt, Campbell Harvey, Matthew Spiegel, Tom Noe, Jeff Rockwell, Brian Tarrant, seminar participants at Central Michigan University, all respondents to my survey (especially those who provided feedback), and the entire finance faculty at Florida State University. Dave Horowitz, Tim Munyon, and Andrew Wilson provided much appreciated guidance in executing the structural equation modeling testing in the dissertation. Also, surveyZ and Qualtrics.com saved me countless hours of work by generously allowing me to use their survey software free of charge. Jean Heck graciously gave me access to his database that also greatly expedited the completion of the dissertation. Lastly, I thank Misty Wright for her expert assistance in collecting the data for this study. All errors in this dissertation are mine. iv TABLE OF CONTENTS LIST OF TABLES............................................................................................................. vi LIST OF FIGURES .......................................................................................................... vii ABSTRACT.....................................................................................................................viii INTRODUCTION AND MOTIVATION .......................................................................... 1 How Efficient Do We Think Us Stock Markets Are And Does It Really Matter?......... 3 What Really Matters When Buying and Selling Stock?................................................. 5 So You Discovered an Anomaly…Gonna Publish It?.................................................... 6 Outline of Dissertation.................................................................................................... 9 HOW EFFICIENT DO WE THINK US STOCK MARKETS ARE AND DOES IT REALLY MATTER?........................................................................................................ 10 Introduction................................................................................................................... 10 Background................................................................................................................... 11 Subjects, Surveys, and Response Rate.......................................................................... 13 How Efficient are US Markets?.................................................................................... 19 Assessing Views of Market Efficiency Based on Investing Objectives....................... 23 Does Market Efficiency Even Matter? ......................................................................... 24 Conclusion .................................................................................................................... 35 WHAT REALLY MATTERS WHEN BUYING AND SELLING STOCKS? ............... 46 Introduction................................................................................................................... 46 Background................................................................................................................... 47 Surveys in Finance Literature ....................................................................................... 52 Survey Subjects, Description, and Distribution............................................................ 53 Results........................................................................................................................... 56 Conclusion .................................................................................................................... 67 SO YOU DISCOVERED AN ANOMALY…GONNA PUBLISH IT?........................... 84 Introduction................................................................................................................... 84 The Theory and Assumptions ....................................................................................... 86 Model Implications ....................................................................................................... 92 Analysis of Empirical Implications – Data and Methods ............................................. 94 Analysis of Empirical Implications – Results............................................................. 101 Conclusion and Discussion......................................................................................... 110 CONCLUSION............................................................................................................... 125 APPENDIX..................................................................................................................... 127 REFERENCES ............................................................................................................... 138 BIOGRAPHICAL SKETCH .......................................................................................... 144 v LIST OF TABLES 1. Summary Statistics 37 2. Opinions About Market Efficiency by Rank 38 3. Market Efficiency Specialists’ Opinions About Market Efficiency 39 4. Respondents’ Propensities to Actively Invest by Rank 40 5. Respondents’ Propensities to Actively Invest by Specialty 41 6. The Congruence of Respondents’ Opinions and Investment Objectives 42 7. Respondents’ Investment Objectives as a Function of Their Opinions and Confidence 43 8. Explaining Investment Objectives – Ordered Probit Analysis 44 9. Summary Statistics Reproduced 69 10. Relative Importance of 14 Groups of Variables 70 11. Relative Importance of 43 Individual Variables 71 12. Investment Experience by Rank 74 13. Respondents Who Have No Experience 75 14. Investment Experience by Gender 76 15. Ordered Probit Analysis of Investment Experience 77 16. What Matters to Active Investors 78 17. What Groups of Variables Matter to Active Investors 80 18. What Matters to Active Traders 81 19. Anomalies and Authors 112 20. Differences in Means and Medians: Anomaly vs. Matched Authors 113 21. Singe-Variable Probit Analyses 115 22. Full Specification Probit Analyses 116 23. Multicollinearity Mitigated Probit Analyses 119 24. Preliminary Regression Analyses 120 25. Multicollinearity Mitigated Regression Analyses 121 26. Principal Components 123 27. Principal Components Regression Analyses 124 vi LIST OF FIGURES I. Structural Equation Modeling
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