When Beliefs Influence the Perceived Signal Precision: Information Provision Style and the Impact of News

47 Pages Posted: 31 Oct 2018 Last revised: 13 Sep 2021

See all articles by Stefanie Schraeder

Stefanie Schraeder

Department of Finance, University of Vienna

Date Written: September 8, 2021

Abstract

In a world of increasingly extensive information, rational investors can make better decisions. However, reinforcement-oriented investors are also more likely to observe preferred signals close to their own perception. A focus on these signals distorts the perceived aggregate signal in the direction of the prior estimate. This reduces belief adaptation. Hence, the empirically well-documented selective exposure / reinforcement theory reduces the impact of greater information availability on price efficiency. Additional information can sometimes even decrease perception correctness. In a market with biased investors, managers have an incentive to announce more, diffuse (fewer, precise) signals in case of negative (positive) information. This results in post-earnings-announcement drift and dispersion anomaly. Also, the distribution shape matters for information processing. For unimodal, symmetric distributions, agents' perceptions converge to the fundamental -- even though at a reduced speed. For multimodal signal distributions, the estimate can diverge from the fundamental.

Keywords: Reinforcement-driven learning, selective exposure, signal processing, behavioral finance, post-earnings-announcement drift, financial anomalies

JEL Classification: G02, G12

Suggested Citation

Schraeder, Stefanie, When Beliefs Influence the Perceived Signal Precision: Information Provision Style and the Impact of News (September 8, 2021). Available at SSRN: https://ssrn.com/abstract=3263246 or http://dx.doi.org/10.2139/ssrn.3263246

Stefanie Schraeder (Contact Author)

Department of Finance, University of Vienna ( email )

Vienna
Austria
+4367760776378 (Phone)

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