CKGSB Henry Cao Awarded to 2011 Spängler IQAM Best Paper Prize

foever · 发表于 2011-8-9 08:51:44

CKGSB Professor Henry Cao Awarded Runner-Up to 2011 Spängler IQAM Best Paper Prize
网址链接：http://www.cheungkong-gsb.com/NewsandEvents/News/SchoolNews/tabid/186/smid/380/ArticleID/3292/reftab/191/Default.aspx
BEIJING - August 8, 2011 – CKGSB Chair of Finance Department and Professor of Finance Henry Huining Cao has received the runner-up prize to the 2011 Spängler IQAM Best Paper Prize for his paper, "Fear of the Unknown: Familiarity and Economic Decisions" that was recently published in Review of Finance (volume 15, issue 3, July 2011). Professor Cao will accept the prize at the Annual Meeting of the European Finance Association in Stockholm, Sweden on August 19, 2011.
The Spängler IQAM Best Paper Prize is an annual prize given by the leading international journal, Review of Finance. The three best papers from the journal's previous four issues are awarded a first place prize of ?3000and two runner-up prizes of ?000.
Professor Cao's paper offers a model to help explain why individuals tend to focus on worst-case scenarios when contemplating a decision that deviates from the status quo. This model of familiarity bias is used examine the endowment effect, portfolio underdiversification, home and local biases and the implications for equilibrium asset pricing. The paper predicts that a modified capital asset pricing model holds wherein the market portfolio is replaced with a portfolio of the stock holdings of investors not subject to familiarity bias.
Professor Cao's distinguished research and teaching career includes an editorship of the International Financial Review. He also sits on the editorial boards of Annals of Economics and Finance and China Financial Review. His research has been published in Journal of Finance, Review of Financial Studies, Journal of Financial Economics, Journal of Economic Theory, Journal of Business, Review of Finance, and Marketing Science. He has been nominated for the Smith-Breeden Award (1998) and for the best paper published in Journal of Finance (2000).
Professor Cao earned a Ph.D. in finance from University of California at Los Angeles (1995) and a Ph.D. in pathology from Yale University (1991). Before joining CKGSB, Professor Cao taught at the University of California at Berkeley, the University of California at San Diego, Ohio State University, Carnegie Mellon and the University of North Carolina at Chapel Hill.

jerryjay · 发表于 2011-8-9 10:59:54

Hope we can meet him in BJ.

michael1999 · 发表于 2011-8-9 12:56:22

Professor Cao Huining: Does Conversation Help Us Make Better Choices?
How do people make choices to invest in a certain company, or buy a particular product? Do they make rational choices or do they just follow the crowd? Is following the crowd the most rational thing they can do? And do their choices get better if they witness the outcome of decisions others have made?

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CKGSB Professor of Finance Huining Cao
BEIJING – 15 July 2011 – In a forthcoming article in the Journal of Economic Theory, CKGSB Professor of Finance Huining Cao, Bing Han, and David Hirshleifer show that people mostly follow others even when they are wrong. Moreover, witnessing and discussing the outcome of other peoples’ decisions doesn’t necessarily stop us making bad choices.

Jumping on the Bandwagon

The herd mentality - jumping on the bandwagon, following fads and fashions – is a human characteristic that behavioral scientists are keen to get to the bottom of. In finance for example, it is a key reason for stock and asset bubbles and crashes. Although many such actions seem irrational, it is still possible to gain useful insight into why they happen.

Behavioral scientists do this by bringing together theories from psychology and economics, and statistically analyzing their findings. For Cao, Han, and Hirshleifer, this involved defining the ideas to be examined, making assumptions and propositions, and working out the probability of particular outcomes.

The Information Cascade

Rather than making individual choices, people are often drawn towards taking certain actions by those around them, by observing their behavior and its outcomes, and engaging in conversation. This is the social learning part of decision-making. It is seen as sensible to do what other people are doing, as their actions are presumably based on some favorite information. In turn, those who follow us believe our actions are informative, too. When this happens to a chain of individuals time and time again, it's called an information cascade.

The problem with information cascades is that they often result in uninformative outcomes as information cascade does not aggregate the information of all participants in the cascade. Just observing the actions of others and making the same choices based on those observations alone can lead to arbitrary or wrong decisions. Often, a long time has passed since someone actually examined the logic behind following a particular path.

The lack of information from alternative choices means that further down the line, people have even less on which to base a potentially dissenting decision. "I don't know why I did it, it's always been like that," sums up this line of thought. Applied to China today, the popularity of Louis Vuitton bags is a good example. Why, despite the fact that other cheaper bags offer the same quality, does LV sell so well?

Rationalizing the Sheep Mentality

Maintaining the view that people are rational, scholars have come up with a number of reasons why information cascades continue despite repeated sub-optimal outcomes. Often, they are taken not as the result of individual weighing up of costs and benefits and actively selecting the path to greatest personal benefits, but simply by following "received opinion."

When people are stuck on the wrong choice, new information from payoffs, which help explain the real value of any project, sometimes jostles subsequent players into experimentation.

Many have suggested that something blocks our access to the independent information we need to base decisions on. The something appears to be the behavior of the people who made decisions earlier on.

The information cascade theory has been analyzed with models permitting different degrees of access to information surrounding a decision. In earlier analysis, "society is trapped in mistaken choices until an external shock arrives" as nothing but the previous decision is known.

In their study to be published in the Journal of Economic Theory, Cao, Han, and Hirshleifer feed additional information into the model. They allow for observation of and conversation about payoffs.

Given this extra information, they find that the probability of an information cascade lasting forever is lower. When people are stuck on the wrong choice, new information from payoffs, which help explain the real value of any project, sometimes jostles subsequent players into experimentation.

Information Blockage

However, society can settle into making continued wrong choices that informational shocks are not strong enough to dislodge. Information blockage needs only limited restrictions to observation or conversation in order to occur. Information is aggregated inefficiently because of information externalities.

The first is that individuals fail to see the benefit to later decision-makers of adjusting their actions. The second is that the quality of payoff information affects the quality of later decision-makers' choices.

Positive developments in society are harmed by a lack of experimentation on "the road less travelled by." Take the example of scientific research grants. Although individual researchers may benefit from having a small number of broad funding channels, society will gain from having more diversity of funding organizations. This will enable more research into less frequently investigated areas.

A Little Less Conversation

Observation of payoffs does not necessarily help reduce bad decision cascades. The earlier payoff information becomes known, the sooner a re-enforcing cascade will start up. Conversely, if there is less conversation at the start, more information will be available for aggregation by later players before "cascades clog the flow of information."

Moreover, conversation about payoffs doesn't seem to help. Conversation is often "noisy," meaning that it lacks factual substance. Engaging in conversation makes it hard to pick out the real payoff information.

The rise of the mass media and of interactive communication technology has made it easier to observe the payoff outcomes of others. Although this seems to offer the decision-maker more information on which to make a choice, this is true only at the beginning of a chain of decision-making. For later actors, decisions further up the chain are seen as opaque. For these people, it makes sense for them to follow prior decisions. The void of information about alternatives means that they might be stepping off a cliff if they don't.

Abstract:

Taking the Road Less Travelled: Does Conversation Eradicate Pernicious Cascades?

We offer a model in which sequences of individuals often converge upon poor decisions and are prone to fads, despite communication of the payoff outcomes from past choices. This reflects both direct and indirect action-based information externalities. In contrast with previous cascades literature, cascades here are spontaneously dislodged and in general have a probability less than one of lasting forever. Furthermore, the ability of individuals to communicate can reduce average decision accuracy and welfare.

michael1999 · 发表于 2011-8-9 13:12:07

Professor Gan Jie: How Corporate Transparency Influences Stock Returns
An environment with more transparent information can lead to higher rather than lower stock return synchronicity, argues CKGSB Professor Gan Jie.

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In recent research, Cheung Kong Graduate School of Business Professor Gan Jie has debunked the assumption that companies with less public disclosure have stock prices that reflect more market-wide information and less firm-specific information. Along with Sudipto Dasgupta and Ning Gao, Professor Gan has argued that stock prices are more affected by unknown information. Less transparent firms’ stock prices will react more to new firm-related information than market trends, so their stock return synchronicity, the part of the variation in the stock return that can be explained by market information, will be lower. Investors will naturally have greater information about more transparent firms, so such stocks' price synchronicity will be higher.

In developing economies with imperfect information disclosure like China's, most stock prices tend to rise when the market is up and fall when the market is down. Financial economists have typically seen this as a clear case of less transparency causing higher stock synchronicity. The authors challenged this assumption.

"Our point is that a more transparent information environment can lead to higher rather than lower stock return synchronicity because stock prices respond only to announcements not already anticipated by the market," the authors said.

"When the information environment of a firm improves and more firm-specific information is available, market participants are able to improve their predictions about the occurrence of future firm-specific events. As a result, the surprise components of stock returns will be lower when the events are actually disclosed, and return synchronicity will be higher."

The authors used rigorous quantitative analysis of seasoned equity issues, American Depository Receipt listings and firm age to support their proposition. They examined corporate data that greatly varies over the short-term like earnings and data that change only slowly over the long-term like managerial quality. Large releases of short-term information before equity issues drive higher stock return synchronicity as uncertainty is dispelled. This is especially true when publicly listed companies issue new equity (seasoned equity issues or SEOs) and cross list shares on other stock exchanges in addition to their original one. Cross listing is commonly done by foreign, listed companies publicly listing again in America through American Depository Receipts or ADRs.

According to the authors' research on U.S. firms from 1976-2004, facts that only change slowly over the long-term such as managerial quality have a greater impact on synchronicity for older firms because it takes many years for the market to discover and digest this information. ADRs lead to a four percent increase in stock return synchronicity after the ADR year in contrast to being four percent lower in the year before the ADR listing. SEOs have a smaller impact, boosting stock return synchronicity by one percent in the one to two years after the SEO in contrast to being one percent lower in the year prior to the SEO. Basically, synchronicity decreases before the information releases associated with ADRs and SEOs, but increases afterward.

"ADR listings are likely to be bigger information events than SEOs as the listing firms need to, in addition to usual disclosure, comply with SEC regulations that typically require more disclosure than exchanges in their home countries," the authors said.

"Our model suggests a dynamic response of return synchronicity to an improvement in the information environment. At the time when new information is disclosed and impounded into stock prices, the firm-specific return variation will increase. But since a big chunk of relevant information is already reflected in stock prices, the firm-specific return variation of SEO and cross-listed firms will be subsequently lower," they said.

Confounding the conventional wisdom, increased disclosure by public companies leads to their stock prices varying more due to market-wide data in the future than due to company-specific information. This is because their transparency today decreases the chance of surprise tomorrow. For investors, this is a welcome finding in volatile markets. For managers of public companies, it may lead to more pressure from investors for open disclosure and stable stock prices.

"Transparency, Price Informativeness, Stock Return Synchronicity: Theory and Evidence"
Sudipto Dasgupta, Hong Kong University of Science & Technology
Jie Gan, Cheung Kong Graduate School of Business
Ning Gao, University of Manchester
Journal of Financial and Quantitative Analysis

Abstract:
This paper argues that, contrary to the conventional wisdom, stock return synchronicity (or R2) can increase when transparency improves. In a simple model, we show that, in more transparent environments, stock prices should be more informative about future events. Consequently, when the events actually happen in the future, there should be less "surprise", i.e., there is less new information impounded into the stock price. Thus a more informative stock price today means higher return synchronicity in the future. We find empirical support for our theoretical predictions in three settings, namely firm age, seasoned equity issues, and listing of ADRs

CKGSB Henry Cao Awarded to 2011 Spängler IQAM Best Paper Prize

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