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ABSTRACT
This paper investigates the role of stock characteristics and investor type in market myopia. Using the Generalized Method of Moments (GMM) to control for endogeneity, we obtain evidence indicating that market myopia is greater among stocks that are relatively hard-to-value and hard-to-arbitrage, and find this conclusion to be robust to the choice of proxy for these characteristics. We also obtain a significantly negative relationship between institutional ownership and market myopia, due to the former acting as informed traders who exploit mispricing created by individual traders. It is important to note that the impact of their role becomes significant only when they have a sizeable share in firm ownership, as is the case of UK mutual funds and pension funds and Spanish banks.
Acknowledgment
We would like to thank the editor and referee for their helpful comments. An earlier version of this paper was published as Working Paper n° 625 Colección de Documentos de Trabajo de la Fundación de las Cajas de Ahorros (FUNCAS)”
Funding
This paper has received financial support from the Spanish Ministry of Economy and Competitiveness (ECO2012-35946-C02-01).
Notes
1. According to Eames [Citation1995], the reason for the higher prevalence of myopic behavior in the U.S. market in comparison with others, such as the Japanese or German markets, may be due to country-specific market, economic or cultural characteristics.
2. Although limited attention could be a source of market myopia, there are other potential sources of this bias, such as overconfidence (which may often be a source of limited attention; Hirshleifer and Teoh [Citation2003]), the certainty effect, prospect theory, and anchoring.
3. We should point out that very low BTM can also be associated with firms that are hard to value due to a higher risk of financial distress.
4. In line with Corredor et al. [Citation2013a], we have incorporated an additional estimation in which HVDA stocks are required to qualify for inclusion in the fifth volatility quintile while meeting one other condition (high volatility and small size, high volatility and high growth options or high volatility and low turnover)
5. Collins, Gong, and Hribar [Citation2003] and Bartov, Radhakrishnan, and Krinsky [2000] tried to determine to what extent the degree of institutional ownership contributes to the removal of anomalies.
6. The reason we did not impose the restriction of a negatively signed coefficient for the long-term component is that the long-term earnings coefficient is not significantly different from zero. If we were to impose a negatively signed coefficient on the dummy variable, this might impose a negative sign on the overall coefficient , which would be hard to explain in economic terms.
7. We assume a company to have no institutional investors if their percentage of direct shareholdings is less than 0.01%.
8. More specifically, SETS is the London Stock Exchange's premier electronic trading service: it is a hybrid system combining electronic order-driven trading with market maker liquidity provision.
9. Given that our sample is restricted to firms with at least 3 consecutive observations, few of the samples analyzed are likely to comply and therefore the M2 statistic is probably not correctly computed.
10. All estimations performed using Xtabond2 (Roodman [2006]). For further details, see Roodman's “An Introduction to “Difference” and “System GMM in Stata.”
11. The initial sample comprised 650 UK firms and 120 Spanish firms.
12. Various filters suggested by Ince and Porter [Citation2006] were applied to avoid bias from the naïve use of Thomson Datastream data.
13. In line with the objectives of the study, we present the institutional ownership structure in the United Kingdom and Spain divided into two categories: banks and mutual funds/pension funds.
14. AMADEUS is a pan-European commercial database containing historical-financial information. It also includes data on firm ownership structure, but only for the current year. Therefore, to construct the database for the entire sample period (2002–2007), we used the different editions of the AMADEUS database for each year of the sample period (2002–2007).
15. Following Baker and Wurgler [Citation2006] and Kumar [Citation2009].
16. In euros in both cases. In pounds sterling, average market value of the UK sample shares over the period considered is 4,092.44.
17. The data used to approximate risk-free assets are available from EUROSTAR as part of the series: EMU convergence criterion series–monthly data. For market indices, we used the benchmark indices included in Datastream, specifically, Ibex35 and FTS100. The expected risk premia were based on excess market returns over the risk-free rate computed over the past 10 years.
18. For the null hypothesis and
we obtain χ2(4)=126.06 with p=0.00 for the UK and χ2(4) =73.35 p=0.00 for Spain. The results are fairly similar for H0:
. That is, χ2(2)=130.97, p=0.00 and χ2(2)=70.03 p=0.00 for the United Kingdom and Spain, respectively.
19. The only exception is size, which is significant only at the 12% level.
20. The findings coincide with those obtained for the analysis of the share of institutional ownership, which was performed on three groups (25%, 50%, and 25%) based on the characteristics of the stocks under consideration. The results are available upon request.
21. An analysis (with similar findings) was also performed dividing the sample into three groups (25%, 50%, and 25%), in terms of the global percentage of institutional ownership and institutional investor type. Nevertheless, given that a subsequent joint analysis of institutional ownership and stock characteristics was performed, the main analysis is on groups above and below the median.
22. Bushee [Citation2001] for market myopia and Dennis and Strinckland [Citation2002] and Covrig and Ng [Citation2004] for the relationship with trading volume and investor type.
23. Our findings suggest that well-organized and liquid markets, which the Financial Accounting Standards Board and International Financial Reporting Standards assume to be a sufficient condition to make market price a valid proxy for fair value, is, in fact, a necessary, but not sufficient, condition for this assumption. We find at least two additional factors for consideration: namely, stock characteristics and investor type.