Andrei Shleifer
- Published in print:
- 2000
- Published Online:
- November 2003
- ISBN:
- 9780198292272
- eISBN:
- 9780191596933
- Item type:
- book
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0198292279.001.0001
- Subject:
- Economics and Finance, Financial Economics
This book describes an approach, alternative to the theory of efficient markets, to the study of financial markets: behavioural finance. It begins by assessing the efficient market hypothesis, ...
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This book describes an approach, alternative to the theory of efficient markets, to the study of financial markets: behavioural finance. It begins by assessing the efficient market hypothesis, emphasising how some of its foundations are contradicted by psychological and institutional evidence. It then introduces the theory of behavioural finance and devotes the rest of the book to explore its main aspects, concentrating on the role and characteristics of noise traders, arbitrageurs, and investors. Chapters 2 through 4 focus on the limits imposed on arbitrage by factors such as risk aversion or agency problems. Two crucial conclusions are reached. First, plausible theories of arbitrage do not lead to the prediction that markets are efficient—quite the opposite. Second, the recognition that arbitrage is limited, even without specific assumptions about investor sentiment, generates new empirically testable predictions, some of which have been confirmed in the data. Chapters 5 and 6 centre on how investor sentiments are built, emphasising some empirical violations to the idea of efficient markets such as price bubbles. The book concludes suggesting that the theory of behavioural finance is indeed more effective that the efficient market theory in explaining some financial evidence.Less
This book describes an approach, alternative to the theory of efficient markets, to the study of financial markets: behavioural finance. It begins by assessing the efficient market hypothesis, emphasising how some of its foundations are contradicted by psychological and institutional evidence. It then introduces the theory of behavioural finance and devotes the rest of the book to explore its main aspects, concentrating on the role and characteristics of noise traders, arbitrageurs, and investors. Chapters 2 through 4 focus on the limits imposed on arbitrage by factors such as risk aversion or agency problems. Two crucial conclusions are reached. First, plausible theories of arbitrage do not lead to the prediction that markets are efficient—quite the opposite. Second, the recognition that arbitrage is limited, even without specific assumptions about investor sentiment, generates new empirically testable predictions, some of which have been confirmed in the data. Chapters 5 and 6 centre on how investor sentiments are built, emphasising some empirical violations to the idea of efficient markets such as price bubbles. The book concludes suggesting that the theory of behavioural finance is indeed more effective that the efficient market theory in explaining some financial evidence.
Andrei Shleifer
- Published in print:
- 2000
- Published Online:
- November 2003
- ISBN:
- 9780198292272
- eISBN:
- 9780191596933
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0198292279.003.0003
- Subject:
- Economics and Finance, Financial Economics
Begins by describing the closed end fund puzzle and enumerating some of the standard accounts that have been used to explain it. Then, applying the model developed in the previous chapter, the author ...
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Begins by describing the closed end fund puzzle and enumerating some of the standard accounts that have been used to explain it. Then, applying the model developed in the previous chapter, the author comes to the conclusion that the apparent puzzle could be interpreted in terms of the influence of (individual) investors sentiments on securities prices. This interpretation, in turn, provides some useful hypotheses that are tested with evidence from the US, proving that behavioural finance theory can provide testable predictions.Less
Begins by describing the closed end fund puzzle and enumerating some of the standard accounts that have been used to explain it. Then, applying the model developed in the previous chapter, the author comes to the conclusion that the apparent puzzle could be interpreted in terms of the influence of (individual) investors sentiments on securities prices. This interpretation, in turn, provides some useful hypotheses that are tested with evidence from the US, proving that behavioural finance theory can provide testable predictions.
Andrei Shleifer
- Published in print:
- 2000
- Published Online:
- November 2003
- ISBN:
- 9780198292272
- eISBN:
- 9780191596933
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0198292279.003.0005
- Subject:
- Economics and Finance, Financial Economics
Studies how investors form their beliefs. It begins with an overview of some of the empirical violations of market efficiency that recent models of investor sentiment try to address. It then presents ...
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Studies how investors form their beliefs. It begins with an overview of some of the empirical violations of market efficiency that recent models of investor sentiment try to address. It then presents an alternative model motivated by the idea that, in forecasting future earnings, investors interpret data on recent past earnings conservatively and using the representativeness heuristic. The simple model is consistent with both psychological evidence and the evidence from security price. At the end, some possible extensions are discussed.Less
Studies how investors form their beliefs. It begins with an overview of some of the empirical violations of market efficiency that recent models of investor sentiment try to address. It then presents an alternative model motivated by the idea that, in forecasting future earnings, investors interpret data on recent past earnings conservatively and using the representativeness heuristic. The simple model is consistent with both psychological evidence and the evidence from security price. At the end, some possible extensions are discussed.
Brian R. Cheffins
- Published in print:
- 2008
- Published Online:
- January 2009
- ISBN:
- 9780199236978
- eISBN:
- 9780191717260
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199236978.003.0004
- Subject:
- Law, Company and Commercial Law
This chapter describes why UK investors bought shares in sufficient volume for control to unwind, and explains why the new shareholders refrained from taking a ‘hands on’ role. Despite deterrents ...
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This chapter describes why UK investors bought shares in sufficient volume for control to unwind, and explains why the new shareholders refrained from taking a ‘hands on’ role. Despite deterrents such as blockholders potentially extracting private benefits of control and Britain's 20th century economic ‘decline’, there was meaningful demand for shares, initially from individuals investing on their own behalf and later from institutional investors. Factors underpinning the demand for shares included the accumulation of substantial spare capital available for investment, ‘quality control’ by intermediaries organizing public offerings, information ‘signalling’ from dividend policy, the performance of shares relative to investment alternatives, and periodic waves of investor optimism. When private investors dominated the buy side they rarely took a ‘hands on’ approach with companies, largely due to collective action problems, diversified investment portfolios, and legal rules favouring boardroom incumbents.Less
This chapter describes why UK investors bought shares in sufficient volume for control to unwind, and explains why the new shareholders refrained from taking a ‘hands on’ role. Despite deterrents such as blockholders potentially extracting private benefits of control and Britain's 20th century economic ‘decline’, there was meaningful demand for shares, initially from individuals investing on their own behalf and later from institutional investors. Factors underpinning the demand for shares included the accumulation of substantial spare capital available for investment, ‘quality control’ by intermediaries organizing public offerings, information ‘signalling’ from dividend policy, the performance of shares relative to investment alternatives, and periodic waves of investor optimism. When private investors dominated the buy side they rarely took a ‘hands on’ approach with companies, largely due to collective action problems, diversified investment portfolios, and legal rules favouring boardroom incumbents.
Brian R. Cheffins
- Published in print:
- 2008
- Published Online:
- January 2009
- ISBN:
- 9780199236978
- eISBN:
- 9780191717260
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199236978.003.0006
- Subject:
- Law, Company and Commercial Law
A late 19th and early 20th century ‘corporate lag’ has been identified as a cause of Britain's 20th century economic ‘decline’. However, the number of publicly traded companies increased ...
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A late 19th and early 20th century ‘corporate lag’ has been identified as a cause of Britain's 20th century economic ‘decline’. However, the number of publicly traded companies increased significantly during this period and as of 1914 the market for shares was well-developed by international standards. This chapter explains matters by reference to the ‘sell side’ and ‘buy side’. On the sell side, dilution of control became more palatable as the drive to generate profits ebbed, periodic surges in investor optimism yielded generous exit terms and capital was required to execute mergers. On the buy side, Britain was losing ground to its major economic rivals and company law, financial intermediaries and the press offered weak protection to outside investors. However, the relative investment performance of shares, the regional orientation of many public offerings, the signalling properties of dividends, and occasional investment ‘fads’ all served to fortify demand for shares.Less
A late 19th and early 20th century ‘corporate lag’ has been identified as a cause of Britain's 20th century economic ‘decline’. However, the number of publicly traded companies increased significantly during this period and as of 1914 the market for shares was well-developed by international standards. This chapter explains matters by reference to the ‘sell side’ and ‘buy side’. On the sell side, dilution of control became more palatable as the drive to generate profits ebbed, periodic surges in investor optimism yielded generous exit terms and capital was required to execute mergers. On the buy side, Britain was losing ground to its major economic rivals and company law, financial intermediaries and the press offered weak protection to outside investors. However, the relative investment performance of shares, the regional orientation of many public offerings, the signalling properties of dividends, and occasional investment ‘fads’ all served to fortify demand for shares.
Brian R. Cheffins
- Published in print:
- 2008
- Published Online:
- January 2009
- ISBN:
- 9780199236978
- eISBN:
- 9780191717260
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199236978.003.0008
- Subject:
- Law, Company and Commercial Law
Pre-World War I momentum in favour of diffusion of share ownership was sustained up to 1939. On the sell side, pressure to pay dividends, generational considerations, the periodic availability of ...
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Pre-World War I momentum in favour of diffusion of share ownership was sustained up to 1939. On the sell side, pressure to pay dividends, generational considerations, the periodic availability of generous exit terms, and capital-raising for mergers all continued to provide incentives to unwind control. Aspects of income tax and estate tax combined with taxation of profits and periodic economic slumps to do likewise. On the buy side, the signalling properties of dividends, the investment returns shares delivered and surges in investor optimism all continued to fortify demand for shares. Reduced scope for overseas investment and improved protection from stock exchange regulation and intermediaries organizing share offerings provided a further boost. Despite these trends and despite a bias in favour of passivity among new investors, the available empirical evidence indicates a full divorce between ownership and control remained the exception to the rule up to 1940.Less
Pre-World War I momentum in favour of diffusion of share ownership was sustained up to 1939. On the sell side, pressure to pay dividends, generational considerations, the periodic availability of generous exit terms, and capital-raising for mergers all continued to provide incentives to unwind control. Aspects of income tax and estate tax combined with taxation of profits and periodic economic slumps to do likewise. On the buy side, the signalling properties of dividends, the investment returns shares delivered and surges in investor optimism all continued to fortify demand for shares. Reduced scope for overseas investment and improved protection from stock exchange regulation and intermediaries organizing share offerings provided a further boost. Despite these trends and despite a bias in favour of passivity among new investors, the available empirical evidence indicates a full divorce between ownership and control remained the exception to the rule up to 1940.
Brian R. Cheffins
- Published in print:
- 2008
- Published Online:
- January 2009
- ISBN:
- 9780199236978
- eISBN:
- 9780191717260
- Item type:
- book
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199236978.001.0001
- Subject:
- Law, Company and Commercial Law
The typical British publicly traded company has widely dispersed share ownership and is run by professionally trained managers who collectively own an insufficiently large percentage of shares to ...
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The typical British publicly traded company has widely dispersed share ownership and is run by professionally trained managers who collectively own an insufficiently large percentage of shares to dictate the outcome when shareholders vote. This separation of ownership and control has not only dictated the tenor of corporate governance debate in Britain but serves to distinguish the UK from most other countries. Existing theories fail to account adequately for arrangements in the UK. Corporate Ownership and Control accordingly seeks to explain why ownership became divorced from control in major British companies. The book is organized by reference to the ‘sell side’, which encompasses the factors that might prompt those owning large blocks of shares to exit or accept dilution of their stake and the ‘buy side’, which involves factors that motivate investors to buy equities and deter the new shareholders from themselves exercising control. The book's approach is strongly historical in orientation, as it examines how matters evolved from the 17th century through to today. While a modern-style divorce of ownership and control can be traced back at least as far as mid-19th century railways, the ‘outsider/arm's-length’ system of ownership and control that currently characterizes British corporate governance did not crystallize until the second half of the 20th century. The book brings the story right up to date by showing current arrangements are likely to be durable. The insights the book offers correspondingly should remain salient for some time to come.Less
The typical British publicly traded company has widely dispersed share ownership and is run by professionally trained managers who collectively own an insufficiently large percentage of shares to dictate the outcome when shareholders vote. This separation of ownership and control has not only dictated the tenor of corporate governance debate in Britain but serves to distinguish the UK from most other countries. Existing theories fail to account adequately for arrangements in the UK. Corporate Ownership and Control accordingly seeks to explain why ownership became divorced from control in major British companies. The book is organized by reference to the ‘sell side’, which encompasses the factors that might prompt those owning large blocks of shares to exit or accept dilution of their stake and the ‘buy side’, which involves factors that motivate investors to buy equities and deter the new shareholders from themselves exercising control. The book's approach is strongly historical in orientation, as it examines how matters evolved from the 17th century through to today. While a modern-style divorce of ownership and control can be traced back at least as far as mid-19th century railways, the ‘outsider/arm's-length’ system of ownership and control that currently characterizes British corporate governance did not crystallize until the second half of the 20th century. The book brings the story right up to date by showing current arrangements are likely to be durable. The insights the book offers correspondingly should remain salient for some time to come.
Brian R. Cheffins
- Published in print:
- 2008
- Published Online:
- January 2009
- ISBN:
- 9780199236978
- eISBN:
- 9780191717260
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199236978.003.0005
- Subject:
- Law, Company and Commercial Law
England experienced its first flurry of public offerings of company shares in the 1690s, followed by promotion ‘waves’ in 1720 (‘the South Sea Bubble’), the mid-1820s, the mid-1830s, and the ...
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England experienced its first flurry of public offerings of company shares in the 1690s, followed by promotion ‘waves’ in 1720 (‘the South Sea Bubble’), the mid-1820s, the mid-1830s, and the mid-1840s. Corporate enterprise thus generally grew in importance over time and by the mid-19th century large railway companies had emerged as pioneers of 20th century-style dispersed share ownership. Overall, however, progress was erratic, with periodic waves of enthusiasm for shares being followed by market reversals that swept away many of the new businesses. Moreover, despite Britain experiencing the world's first industrial revolution, few UK manufacturing enterprises had moved to the stock market before the late 19th century. Law was one deterrent but market dynamics were more important, in that industrial enterprises were risky investments and industrialists were disinclined to seek outside investment due to modest capital requirements and a strong sense of independence.Less
England experienced its first flurry of public offerings of company shares in the 1690s, followed by promotion ‘waves’ in 1720 (‘the South Sea Bubble’), the mid-1820s, the mid-1830s, and the mid-1840s. Corporate enterprise thus generally grew in importance over time and by the mid-19th century large railway companies had emerged as pioneers of 20th century-style dispersed share ownership. Overall, however, progress was erratic, with periodic waves of enthusiasm for shares being followed by market reversals that swept away many of the new businesses. Moreover, despite Britain experiencing the world's first industrial revolution, few UK manufacturing enterprises had moved to the stock market before the late 19th century. Law was one deterrent but market dynamics were more important, in that industrial enterprises were risky investments and industrialists were disinclined to seek outside investment due to modest capital requirements and a strong sense of independence.
Henry Lahr
- Published in print:
- 2015
- Published Online:
- August 2015
- ISBN:
- 9780199375875
- eISBN:
- 9780199375899
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199375875.003.0026
- Subject:
- Economics and Finance, Financial Economics
Simultaneously with the private equity (PE) boom of the 1990s, the sub-segment of publicly traded firms that buy and sell private companies expanded almost as quickly as the entire asset class. ...
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Simultaneously with the private equity (PE) boom of the 1990s, the sub-segment of publicly traded firms that buy and sell private companies expanded almost as quickly as the entire asset class. Listed publicly traded PE mirrors the structures of conventional non-listed PE but offers added advantages to investors. This chapter first describes organizational forms and legal structures of publicly traded vehicles and then analyzes their risk profiles and pricing characteristics. Systematic risk of listed vehicles can be substantial while being highly diverse across internally and externally managed entities. Empirical research uses market prices of traded PE funds to estimate the pricing relationship between net asset values (NAVs) and share prices. Evidence suggests that NAV discounts mainly depend on liquidity, fund type, and investor sentiment.Less
Simultaneously with the private equity (PE) boom of the 1990s, the sub-segment of publicly traded firms that buy and sell private companies expanded almost as quickly as the entire asset class. Listed publicly traded PE mirrors the structures of conventional non-listed PE but offers added advantages to investors. This chapter first describes organizational forms and legal structures of publicly traded vehicles and then analyzes their risk profiles and pricing characteristics. Systematic risk of listed vehicles can be substantial while being highly diverse across internally and externally managed entities. Empirical research uses market prices of traded PE funds to estimate the pricing relationship between net asset values (NAVs) and share prices. Evidence suggests that NAV discounts mainly depend on liquidity, fund type, and investor sentiment.