Earnings Announcement Effects Of Behavioral Finance Explanation And Empirical Analysis

Behavioral finance starts from investors' real decision making process to study the effect of investors' behavioral biases to the financial market rules. It is an emerging hybrid discipline. Appling behavioral finance to study the real rules of Chinese stock market, to find the. developing problems in our stock market now, and to instruct Chinese investors to make portfolios and investment strategies is both theoretically and practically significant. Since most behavioral finance research works focus on defining investors' behavior and studying the effect of these behavior to stock pricing, this thesis begins to study a market anomaly to prove the inefficient market hypothesis of behavioral finance; then infers the psychological behavior of investors' under the anomaly and tests these inference with stock price reaction at last.Firstly, the thesis briefly introduces some basic theory and concepts of behavioral finance and compare the theoretical structure of behavioral finance and traditional finance. Secondly, I use two models, namely, naive model and time series model, to examine the post-earnings-announcement drift in Shenzhen A stock market. The empirical research finds that there is obvious post-earnings-announcement drift in the market, which proves the consistency of the anomaly and market inefficiency. Thirdly, I try to combine two behavioral finance explanations, specifically, underreaction and overreaction, and then use the unified theory to infer and test the psychological reaction process of investors to the earnings announcement. The result shows that Chinese investors would underreact to the earnings announcement before the announcement in year t, but the underreaction would soon be replaced by extreme overreaction which causes the price reversal after the announcement. Additionally, the price reversal would continue in long term until after the announcement in year t+1. Therefore, investors could earn abnormal return by making portfolios on the basis oft yearly earnings announcement and choosing a right time to buy and hold these portfolios before t+1 yearly announcement.