Essays on Peer Effects in Finance
No Thumbnail Available
School of Business | Doctoral thesis (article-based) | Defence date: 2016-05-06
Aalto University publication series DOCTORAL DISSERTATIONS, 73/2016
AbstractWhen people make financial decisions, they are often influenced by others around them. The four essays of this dissertation study peer effects in financial decision-making in the areas of corporate finance and household finance. Social interaction effects between individual investors and decision-makers have attracted interest from financial economists, but there is little previous evidence on their microfoundations. The first essay develops a new method for defining peer firms based on joint analyst coverage. The findings suggest that common analysts between firms offer a simple, but powerful, method for identifying closely related firms. The second essay uses stock splits to study peer effects in corporate decision-making. The results indicate that a firm is significantly more likely to execute a stock split if one of its peer firms has recently done so, and splitting probability is also increasing in the announcement returns of peer splits. The third essay studies how word-of-mouth investment information spreads among investors using data from a large Finnish Ponzi scheme called Wincapita. Investors could join the scheme only if an existing investor invited them, and the inviter-invitee relationships allow me to observe how a socially transmitted investment idea spreads from one person to the next through social interaction. The main finding is that the spreading of information follows a so-called scale-free network structure. The network structure explains why word-of-mouth information can spread rapidly even if the average investor shares it with few others. The fourth essay studies how the personal characteristics of the inviters in the Ponzi scheme are related to the invested amounts, and finds evidence of "keeping up with the Joneses" behavior based on relative income differences. This dissertation adds to the knowledge on peer effects in financial decision-making by developing new methodology, utilizing a setting where the identification of corporate peer effects is possible, and using novel data on the spreading of word-of-mouth information. The results contribute to the literature on the economics of social interaction effects and they also provide unique information about the functioning of Ponzi schemes at the level of individual people.
Julkaistu vain painettuna, saatavuus katso Bibid. Published only in printed form, availability see Bibid.
Supervising professorKaustia, Markku, Professor, Aalto University, Department of Finance, Finland
behavioral finance, peer effect, social network, Ponzi scheme
- [Publication 1]: Common Analyst –Based Method for Defining Peer Firms Markku Kaustia, Ville Rantala Unpublished Manuscript.
- [Publication 2]: Social Learning and Corporate Peer Effects Markku Kaustia, Ville Rantala. Unpublished Working Paper Version. A version of the essay has been published in the Journal of Financial Economics volume 117 (2015), 653-669.
- [Publication 3]: How Do Investment Ideas Spread through Social Interaction? Evidence from a Ponzi Scheme. Ville Rantala. Unpublished Manuscript.
- [Publication 4]: Keeping Up with the Ponzis. Ville Rantala. Unpublished Manuscript.