Hostname: page-component-586b7cd67f-t8hqh Total loading time: 0 Render date: 2024-11-24T21:47:57.122Z Has data issue: false hasContentIssue false
  • English
  • Français

Deviations from Norms and Informed Trading

Published online by Cambridge University Press:  08 September 2014

Alok Kumar  and
Jeremy K. Page
Alok Kumar
Affiliation:
[email protected], School of Business Administration, University of Miami, PO Box 248027, Coral Gables, FL 33124
Jeremy K. Page
Affiliation:
[email protected], Marriott School of Management, Brigham Young University, 685 TNRB, Provo, UT 84602.
Get access Rights & Permissions [Opens in a new window]

Abstract

Investment managers are subject to personal and institutional norms that can constrain their investment choices. We conjecture that norm-constrained investors deviate from such norms only when they have compelling information, and we predict that deviating investments earn relatively high abnormal returns ex post. Consistent with our conjecture, we find that institutions averse to holding lottery-like stocks or sin stocks earn relatively high abnormal returns when they choose to hold such stocks. We find similar but weaker results for deviations from broader style categories. Overall, our evidence indicates that deviations from established institutional or social norms signal informed investing.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 4 , August 2014 , pp. 1005 - 1037
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Alesina, A., and La Ferrara, E.. “Participation in Heterogeneous Communities.” Quarterly Journal of Economics, 115 (2000), 847–904.Google Scholar
Almazan, A.; Brown, K. C.; Carlson, M.; and Chapman, D. A.. “Why Constrain Your Mutual Fund Manager?” Journal of Financial Economics, 73 (2004), 289–321.Google Scholar
Barberis, N., and Huang, M.. “Stocks as Lotteries: The Implications of Probability Weighting for Security Prices.” American Economic Review, 98 (2008), 2066–2100.CrossRefGoogle Scholar
Becker, G. The Economics of Discrimination. Chicago, IL: University of Chicago Press (1957).Google Scholar
Ben-David, I.; Glushkov, D.; and Moussawi, R.. “Do Arbitrageurs Really Avoid High Idiosyncratic Risk Stocks?” Working Paper, Ohio State University (2010).CrossRefGoogle Scholar
Bennett, J. A.; Sias, R. W.; and Starks, L. T.. “Greener Pastures and the Impact of Dynamic Institutional Preferences.” Review of Financial Studies, 16 (2003), 1203–1238.Google Scholar
Berk, J. B., and Green, R. C.. “Mutual Fund Flows and Performance in Rational Markets.” Journal of Political Economy, 112 (2004), 1269–1295.CrossRefGoogle Scholar
Berry, F. S., and Berry, W. D.. “State Lottery Adoptions as Policy Innovations: An Event History Analysis.” American Political Science Review, 84 (1990), 395–415.Google Scholar
Boyer, B.; Mitton, T.; and Vorkink, K.. “Expected Idiosyncratic Skewness.” Review of Financial Studies, 23 (2010), 169–202.CrossRefGoogle Scholar
Boyer, B. H., and Vorkink, K.. “Stock Options as Lotteries.” Journal of Finance, 69 (2014), 1485–1527.Google Scholar
Bushee, B. J., and Noe, C. F.. “Corporate Disclosure Practices, Institutional Investors, and Stock Return Volatility.” Journal of Accounting Research, 38 (2000), 171–202.CrossRefGoogle Scholar
Chava, S. “Environmental Externalities and Cost of Capital.” Management Science, forthcoming (2014).CrossRefGoogle Scholar
Chen, J.; Hong, H.; and Stein, J. C.. “Forecasting Crashes: Trading Volume, Past Returns, and Conditional Skewness in Stock Prices.” Journal of Financial Economics, 61 (2001), 345–381.Google Scholar
Cohen, R. B.; Polk, C. K.; and Silli, B.. “Best Ideas.” Working Paper, Harvard University (2010).Google Scholar
Cremers, K. J. M., and Petajisto, A.. “How Active Is Your Fund Manager? A New Measure That Predicts Performance.” Review of Financial Studies, 22 (2009), 3329–3365.Google Scholar
Daniel, K.; Grinblatt, M.; Titman, S.; and Wermers, R.. “Measuring Mutual Fund Performance with Characteristic-Based Benchmarks.” Journal of Finance, 52 (1997), 1035–1058.Google Scholar
Del Guercio, D. “The Distorting Effect of the Prudent-Man Laws on Institutional Equity Investments.” Journal of Financial Economics, 40 (1996), 31–62.Google Scholar
Diaz, J. D. “Religion and Gambling in Sin-City: A Statistical Analysis of the Relationship between Religion and Gambling Patterns in Las Vegas Residents.” Social Science Journal, 37 (2000), 453–458.Google Scholar
Ellison, C. G., and Nybroten, K. A.. “Conservative Protestantism and Opposition to State-Sponsored Lotteries: Evidence from the 1997 Texas Poll.” Social Science Quarterly, 80 (1999), 356–369.Google Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Industry Costs of Equity.” Journal of Financial Economics, 43 (1997), 153–193.Google Scholar
Fama, E. F., and French, K. R.. “Disagreement, Tastes, and Asset Prices.” Journal of Financial Economics, 83 (2007), 667–689.CrossRefGoogle Scholar
Golec, J., and Tamarkin, M.. “Bettors Love Skewness, Not Risk, at the Horse Track.” Journal of Political Economy, 106 (1998), 205–225.CrossRefGoogle Scholar
Green, T. C., and Hwang, B.-H.. “Initial Public Offerings as Lotteries: Skewness Preference and First-Day Returns.” Management Science, 58 (2011), 432–444.Google Scholar
Harvey, C. R., and Siddique, A.. “Conditional Skewness in Asset Pricing Tests.” Journal of Finance, 55 (2000), 1263–1295.Google Scholar
Heinkel, R.; Kraus, A.; and Zechner, J.. “The Effect of Green Investment on Corporate Behavior.” Journal of Financial and Quantitative Analysis, 36 (2001), 431–449.Google Scholar
Hilary, G., and Hui, K. W.. “Does Religion Matter in Corporate Decision Making in America?” Journal of Financial Economics, 93 (2009), 455–473.Google Scholar
Hoffman, J. P. “Religion and Problem Gambling in the U.S.” Review of Religious Research, 41 (2000), 488–509.Google Scholar
Hong, H., and Kacperczyk, M.. “The Price of Sin: The Effects of Social Norms on Markets.” Journal of Financial Economics, 93 (2009), 15–36.Google Scholar
Hong, H., and Kostovetsky, L.. “Red and Blue Investing: Values and Finance.” Journal of Financial Economics, 103 (2012), 1–19.Google Scholar
Ivković, Z.; Sialm, C.; and Weisbenner, S.. “Portfolio Concentration and the Performance of Individual Investors.” Journal of Financial and Quantitative Analysis, 43 (2008), 613–655.Google Scholar
Kacperczyk, M.; Sialm, C.; and Zheng, L.. “On the Industry Concentration of Actively Managed Equity Mutual Funds.” Journal of Finance, 60 (2005), 1983–2011.Google Scholar
Kacperczyk, M.; van Nieuwerburgh, S.; and Veldkamp, L.. “Attention Allocation Over the Business Cycle.” Working Paper, New York University (2013).Google Scholar
Korniotis, G., and Kumar, A.. “Cognitive Abilities and Financial Decisions.” In Behavioral Finance, Baker, H. K. and Nofsinger, J. R., eds. Hoboken, NJ: John Wiley & Sons (2010) 559–576.CrossRefGoogle Scholar
Korniotis, G. M., and Kumar, A.. “Do Portfolio Distortions Reflect Superior Information or Psychological Biases?” Journal of Financial and Quantitative Analysis, 48 (2013), 1–45.Google Scholar
Kumar, A. “Who Gambles in the Stock Market?” Journal of Finance, 64 (2009), 1889–1933.Google Scholar
Kumar, A.; Page, J.; and Spalt, O.. “Religious Beliefs, Gambling Attitudes, and Financial Market Outcomes.” Journal of Financial Economics, 102 (2011), 671–708.CrossRefGoogle Scholar
Lewellen, J. “Institutional Investors and the Limits of Arbitrage.” Journal of Financial Economics, 102 (2011), 62–80.Google Scholar
Martin, R., and Yandle, B.. “State Lotteries as Duopoly Transfer Mechanisms.” Public Choice, 64 (1990), 253–264.Google Scholar
Mitton, T., and Vorkink, K.. “Equilibrium Underdiversification and the Preference for Skewness.” Review of Financial Studies, 20 (2007), 1255–1288.Google Scholar
Schneider, C., and Spalt, O. G.. “Acquisitions as Lotteries: Do Managerial Gambling Attitudes Influence Takeover Decisions?” Working Paper, Tilburg University (2013).Google Scholar
Titman, S., and Tiu, C.. “Do the Best Hedge Funds Hedge?” Review of Financial Studies, 24 (2011), 123–168.CrossRefGoogle Scholar
Zhang, Y. “Individual Skewness and the Cross-Section of Average Stock Returns.” Working Paper, Yale University (2006).Google Scholar
Supplementary material: PDF

Kumar and Page supplementary material

Appendix

Download Kumar and Page supplementary material(PDF)
PDF 129.3 KB