When are Graduate Business Students a Reasonable Proxy for Nonprofessional Investors?
50 Pages Posted: 21 Jun 2004
Date Written: June 2004
We investigate a key assumption underlying much of the experimental research in financial accounting that graduate business students are a reasonable proxy for nonprofessional investors. We investigate this assumption using two settings: (a) an experimental setting from a recent paper that relies on this assumption, and (b) by using a proprietary dataset from a publicly traded company's investor relations website. Our analysis reveals that, on average, early MBA students (i.e., students beginning the "core" MBA classes) acquire information as well as nonprofessional investors but that they are unable to integrate that information with other information when making investment-related judgments and decisions. In contrast, select MBA students (i.e., students who have completed the core and elected to take a financial analysis course) acquire and integrate information as well as nonprofessional investors when making investment-related judgments and decisions. Further tests reveal that early MBA students with significant work experience (e.g., greater than five years) perform better than less experienced, early MBA students and not significantly different from nonprofessional investors. Our results suggest that using graduate business students as a proxy for nonprofessional investors is a valid methodological choice, provided researchers give careful consideration to aligning their tasks with the appropriate level of education and/or work experience.
Keywords: Investor sophistication, behavioral research in accounting, stock options
JEL Classification: M41, C91
Suggested Citation: Suggested Citation