Stock price behavior and rational investors
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by Lynn L. Rees |
My research focuses on the impact that accounting information has on companies' stock prices. This research examines the following general topics: 1) What accounting data in financial statements do investors and financial analysts find most useful when making investment decisions; 2) What accounting information do investors and financial analysts ignore; and 3) Do investors and financial analysts fully appreciate all the information in accounting data when assessing the value of the company? Evidence from this type of research can be useful to regulators in establishing rules that companies must follow when constructing financial statements. Accountants can benefit in determining the most effective and efficient manner to present financial statement data. Also, this research will potentially reveal new trading strategies that can yield superior returns on investments.
Most of the research in finance and accounting over the past several years has assumed that individuals are fully rational and will efficiently use any relevant information that is disclosed to determine the value of a company. This rational approach implies that stock prices for companies on the NYSE, NASDAQ or other security exchanges reflect all available information. Plenty of research is consistent with this notion of efficient capital markets. About 90 percent of all mutual funds, for example, earn investment returns less than returns on index funds — such as the S&P 500 — that merely invest in companies representing the overall market.
As research in finance and accounting expands, however, some evidence cannot be explained by traditional efficient market models. As inconsistencies to efficient markets continue to grow, so too does demand for alternative explanations for stock price behavior. My research currently employs theories in cognitive psychology, the study of how people think and make decisions, to explain some of the efficient market anomalies that we observe.
This research is potentially fruitful in providing new insights as to how investors and analysts use accounting information to assess the value of a company. As our understanding of stock price behavior increases, we will be better informed as to what accounting information should be provided to investors. Further, this knowledge will facilitate developing trading strategies that earn superior returns on investment.
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