The Affect Heuristic and Stock Ownership: A Theoretical Perspective

59 Pages Posted: 15 Jan 2017 Last revised: 20 Apr 2018

See all articles by Jiang Luo

Jiang Luo

Nanyang Technological University (NTU) - Division of Banking & Finance

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

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Date Written: March 24, 2018

Abstract

We consider a setting where owning stock confers direct utility due to an affect heuristic. Specifically, holding equity in companies with visible brands or environmentally conscious products yields positive consumption benefits, whereas investing in sin stocks yields the reverse. We find that stock prices deviate from expected fundamentals even when assets are in zero net supply. Stocks that yield high direct utility are, on average, more informationally efficient as they stimulate more entry into the market for these stocks and, consequently, more information collection. The analysis also accords with a value effect, high valuations of brand-name stocks, abnormally positive returns on sin stocks, volume premia in the cross-section of returns, proliferation of mutual funds and ETFs, and yields untested implications. If, as psychological literature suggests, agents derive greater utility from successful companies then asset prices react to public signals non-linearly, leading to booms and busts, as well as crashes and recoveries.

Suggested Citation

Luo, Jiang and Subrahmanyam, Avanidhar, The Affect Heuristic and Stock Ownership: A Theoretical Perspective (March 24, 2018). Review of Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2899799 or http://dx.doi.org/10.2139/ssrn.2899799

Jiang Luo

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

S3-01C-75 50 Nanyang Avenue
Singapore, 639798
Singapore

Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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