New insights from behavioural finance

Prof. François Degeorge, USI and Swiss Finance Institute

Back in the 1960s, when the University of Chicago developed the concept of “efficiency” of financial markets, it was believed that share prices of listed companies would react promptly to information related to external events. As such, markets were considered efficient, at least in theory: investing amounted de facto to the diversification of choices, as all necessary information was already included in the share prices; corporate communication was therefore almost redundant because information was “fluid” and investors could exploit it to their advantage.

Over the past two decades economists have moved beyond this idealistic vision, adopting instead that of behavioural finance, according to which financial information struggles to find a correct dissemination and companies are forced to invest resources to optimise it. Herbert Simon (Nobel Prize 1978) had previously predicted that one of the limits of humans to absorb information, in a world where it grows relentlessly, lies not in the lack of it, rather in the limited attention capacity of individuals. When a large number of companies publishes information on the same day, investors are literally bombarded with data coming from many different channels, resulting in delay, in fact, in its absorption.

Taking the cue from these considerations, a study recently published in the Review of Finance, “News dissemination and investor attention” has investigated the way companies in the very fragmented European market (also for linguistic reasons) submit the most market-appealing information, namely earning results.

For many years, American and British companies have relied on wire services that publish English-language in a standard format. European countries, on the other hand, have begun using the same system only recently. The study shows how the usage of wire services to communicate earning results, which provide information with language uniformity and in structured electronic format, entails an immediate “responsiveness” of stock prices and an increase in transaction volumes, as investors are more attentive and their ability to absorb information is made easier.

As expected, this effect has proven to be more significant for companies in countries with a lower level of technological development, for which the adoption of the new instrument, that improves the technology for the dissemination of information, has the effect of increasing the interest of investors. Therefore, wire services allow financial economists to affirm that, for once, “The medium at least is a part of the message”.