Can events with utterly no information content affect stock price? Efficient market hypothesis proponents don’t believe so, yet researchers continue to find evidence price can be significantly driven by non-informative attention and the trading of enthusiastic investors.
An especially dramatic example of this is DI-Corp, a Korean semiconductor firm. In 2012 it released no material news about its fundamentals, yet over the course of three months its stock price spiked 800 percent, finishing the year with a 120 percent gain. What accounts for this pricing pattern?
Andy Kim, assistant professor of finance at Singapore’s Nanyang Business School, attributes it to a phenomenon he calls the ‘PSY effect’. PSY is the stage name of Korean rapper Park Jae-sang. In summer 2012, his Gangnam Style music video, featuring a catchy hook and horse riding dance, went mega-viral, reaching the top of the pop music charts in more than 30 countries and spawning countless parody videos in social media. And PSY’s father just happens to be chairman and co-CEO of DI-Corp.
‘If the efficient market hypothesis holds true, DI-Corp’s stock price should have remained flat,’ says Kim. ‘But my research shows its price bubble had nothing to do with the firm’s economic fundamentals and everything to do with enthusiastic investor attention in the global capital market.’
Kim and study co-author Hosung Jung, an economist at the Bank of Korea, say the PSY effect is most likely an example of the ‘resale option hypothesis’: an asset price bubble triggered by individual investors believing they can resell the stock to more optimistic investors in the future.
‘The day after a parody video was uploaded in a specific country, I found significant buying pressure of DI-Corp stock from that country,’ says Kim. ‘But people living in Korea were selling the stock on the same day.’ Why this trading pattern? Kim says the locals had previously bought the stock when Korean media reported PSY was in talks with Canadian pop star Justin Bieber’s producer. ‘They anticipated a bubble,’ he concludes.
The price of staying on-script
CEOs facing challenging circumstances are more likely to ‘stick to the script’ when answering analyst questions during earnings calls, notes a Washington University study. And the more rote the response, the more likely a negative market reaction and downward revisions in analyst forecasts.
‘Investors pick up on scripting,’ says study author Joshua Lee, a PhD candidate at Olin Business School. ‘They see it as a negative signal of future performance.’
And Lee’s research suggests investors are, in most cases, right. Applying stylistic analysis to a sample of more than 30,000 conference calls, he documents a negative association between Q&A scripting and both return on assets and operating cash flows in the year following the call.
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