Price Anchoring in the Stock Market

80 Pages·2016·1.78 MB·English

UNIVERSITEIT GENT
GHENT UNIVERSITY

FACULTEIT ECONOMIE EN BEDRIJFSKUNDE
FACULTY OF ECONOMICS AND BUSINESS
ADMINISTRATION

ACADEMIC YEAR 2015 – 2016

Price Anchoring in the Stock Market

Masterproef voorgedragen tot het bekomen van de graad van
Master’s Dissertation submitted to obtain the degree of

Master of Science in Business Administration

Thomas Longeval
Thomas Van Der Vaerent

Under the guidance of

Prof. Koen Inghelbrecht
Mr. Hannes Stieperaere
UNIVERSITEIT GENT
GHENT UNIVERSITY

FACULTEIT ECONOMIE EN BEDRIJFSKUNDE
FACULTY OF ECONOMICS AND BUSINESS
ADMINISTRATION

ACADEMIC YEAR 2015 – 2016

Price Anchoring in the Stock Market

Masterproef voorgedragen tot het bekomen van de graad van
Master’s Dissertation submitted to obtain the degree of

Master of Science in Business Administration

Thomas Longeval
Thomas Van Der Vaerent

Under the guidance of

Prof. Koen Inghelbrecht
Mr. Hannes Stieperaere
1. Confidentiality Clause
Ondergetekende verklaart dat de inhoud van deze masterproef mag geraadpleegd en/of
gereproduceerd worden, mits bronvermelding.

Naam studenten: Thomas Longeval & Thomas Van Der Vaerent

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2. Nederlandstalige samenvatting
Deze thesis onderzoekt de behavioral bias “anchoring.” Anchoring is het toekennen van een
bepaalde mate van gewichtigheid aan nietszeggende informatie bij het waarderen van een goed,
ervaring of, in het kader van deze thesis, een aandelenprijs. De aandelenprijs is an sich niet
informatief, omdat deze relatief gemakkelijk te beïnvloeden is door het aantal aandelen aan te
passen. Dat is waarom wij onderzoeken of beleggers hun beleggersbereidheid (deels) laten
afhangen van deze aandelenprijs. Als dit het geval zou zijn, zou dit een toevoeging kunnen zijn
aan de literatuur die diverse “raadsels” in de aandelenmarkt tracht te verklaren. Via een eigen
experiment dat gericht is op de beleggersbereidheid van de respondenten, vinden we dat er geen
significant effect is in deze bereidheid ten aanzien van een hoger geprijsd aandeel vergeleken met
een lager geprijsd aandeel. Deze conclusie is in het voordeel van de Efficient Market Hypothesis,
maar er zijn wel aanwijzingen dat investeerders een lager geprijsd aandeel aantrekkelijker vinden
dan een aandeel dat hoger geprijsd is. Verder onderzoek is dus nog nodig.

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3. Preface
We would like to thank our promotor Mr. Hannes Stieperaere for the wonderful cooperation and
the support in writing this thesis. Furthermore, we would like also like to thank our families and
friends for the amazing support in the months leading up to our final thesis.

Thomas Longeval & Thomas Van Der Vaerent
Ghent, June 2016

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4. Table of Contents
1. Confidentiality Clause .............................................................................................................. i
2. Nederlandstalige samenvatting ................................................................................................ ii
3. Preface ..................................................................................................................................... iii
4. Table of Contents .................................................................................................................... iv
5. List of used abbreviations ....................................................................................................... vi
6. List of tables & figures .......................................................................................................... vii
6.1. Figures .......................................................................................................................... vii
6.2. Tables ............................................................................................................................ vii
1. Abstract .................................................................................................................................... 1
2. Introduction .............................................................................................................................. 2
3. Literature Review ..................................................................................................................... 4
3.1. Stock Market Puzzles ..................................................................................................... 4
3.2. The Efficient Market Hypothesis .................................................................................... 8
3.3. Behavioral Economics .................................................................................................. 10
4. Methodology .......................................................................................................................... 19
5. Results .................................................................................................................................... 22
5.1 General Overview ......................................................................................................... 22
5.2 Paired Samples T-test ................................................................................................... 23
5.3 Relative OLS Regressions ............................................................................................ 24
5.4 Absolute OLS Regressions ........................................................................................... 26
5.5 Anchoring effect between pairs .................................................................................... 29
6. Conclusion ............................................................................................................................. 30
7. Bibliography .......................................................................................................................... 33
8. ADDENDUM ........................................................................................................................ 36
8.1. Survey ........................................................................................................................... 36
8.2. Descriptive statistics control variables ......................................................................... 54
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8.3. Relative OLS regressions ............................................................................................. 55
8.4. Absolute OLS regressions without control variables ................................................... 59
8.5. Absolute OLS regressions with control variables ........................................................ 62
8.6. Paired samples t-test ..................................................................................................... 66
8.7. ANOVA ........................................................................................................................ 68

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5. List of used abbreviations
AAM Absolute Anchoring Measure
ACAPM Anchoring Adjusted Capital Asset Pricing Model
CAPM Capital Asset Pricing Model
EMH Efficient Market Hypothesis
EPP Equity Premium Puzzle
FEPS Forecasted Earnings Per Share
IPO Initial Public Offering
NSPP Nominal Share Price Puzzle
RAM Relative Anchoring Measure
USSEC United States Securities Exchange Commission

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6. List of tables & figures
6.1 Figures

Figure 1: Average share price with and without stock splits
Figure 2: Real annual return on the S&P 500 index
Figure 3: Real annual return on T-bills
Figure 4: Pricing according to EMH
Figure 5: Pricing according to behavioral economics
Figure 6: Raw data table
Figure 7: Bar graph of average willingness to accept
Figure 8: Graph on the anchoring effect between pairs

6.2 Tables

Table 1: Table concerning significance levels
Table 2: ANOVA of the willingness to accept scores
Table 3: Paired Samples t-test on oddly priced pairs
Table 4: OLS regression on the RAM of the regular pairs with control variables
Table 5: OLS regression on the RAM of the oddly priced pairs with control variables
Table 6: OLS regression on the AAM of the regular pairs without control variables
Table 7: OLS regression on the AAM of the oddly priced pairs without control variables
Table 8: OLS regression on the AAM of the regular pairs with control variables
Table 9: OLS regression on the AAM of the regular pairs with control variables
Table 10: Graph on the anchoring effect between pairs
Table 11: ANOVA on the anchoring effect between pairs
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Price Anchoring in the Stock Market

1. Abstract
This scientific paper has the ambition to investigate whether the behavioral bias known as “price
anchoring” can be found in the stock market. Anchoring is a behavioral bias that can be defined
as the attributing of explanatory power to uninformative pieces of information to value a certain
good or experience. That is why we explore the notion of investors giving explanatory power to
the absolute price level of a stock. The price of a stock is inherently uninformative and can be
manipulated relatively easy through e.g. (reverse) stock splits. This is especially relevant as
anchoring could explain several stock market puzzles. We find that investors do anchor on stock
prices, but as they do this in different directions, the stock price remains unaffected. However,
there are indications that investors tend to anchor negatively, meaning they are more willing to
invest in shares with a low absolute price than in shares with a high absolute price.

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