YSU prof’s research targets behavioral finance

Staff report

youngstown

In business, timing is everything.

But one Youngstown State University professor is finding that emotion has a role of its own when it comes to investors and the stock exchange.

As part of her 2009-10 research professorship, Xiaolou Yang, assistant professor of accounting and finance, studied the effects of delayed annual earnings announcements on the stock market.

Her yearlong research that garnered publication in The Journal of Applied Research in Finance found that delayed disclosure of bad news is associated with a significant stock-return decline. On the other hand, stock markets reward the late disclosure that conveys good news.

“The study is an important link to the school of behavioral finance,” said Yang, who specializes in corporate finance and governance. “It breaks down the ties to traditional finance, which assumes people behave with rigid rationality, and connects more to the reality that emotion plays a role in financial decisions.”

Behavioral finance, an emerging model that challenges traditional finance, blends psychology with economics to explain decision-making processes.

Where traditional finance assumes people commit fully to decisions that are based on objective economic models, behavioral finance argues that people also let their self-interests influence decisions. Moreover, it says people act conservatively in carrying out these decisions.

Instead of going all in on an investment that seems to offer the highest return, for example, people may only be willing to risk a small amount of money at first or wait until they see how others act before investing.

Yang, who worked with data samples between 1996 and 2005, said her findings support this theory of conservatism in behavioral finance.

To conduct her study, she gathered NYSE, AMEX and NASDAQ stock return information; earnings forecasts coupled with actual earnings from nearly 2,000 firms; and the length of each company’s reporting lag, which is the number of days between the end of the fiscal year and the actual announcement of annual earnings for a company.

Plugging the data into various equations, Yang found stock-return averages after good and bad news was announced on time. She then compared these figures with stock-return averages associated with delayed announcements.

Stock returns declined more significantly when bad-news announcements were delayed rather than delivered in a timely fashion; likewise, companies were rewarded more when good-news announcements were late.

According to Yang, the results support the behavioral model because reactions to news were more fully revealed after announcement delays, and this shows investors acting more conservatively in committing to a decision.

While past studies have focused more on corporate disclosure strategy and quality, Yang says timing is more important.

She added that the results are especially useful to investors and businesses in understanding today’s stock market under a behavioral lens. Yang is focusing her research on how financial analyst forecasts affect stock returns.

Yang earned a doctorate in economics with a concentration in finance at the University of Texas at Austin.