The Signaling Role of Seemingly Myopic Investment Behavior

The Signaling Role of Seemingly Myopic Investment Behavior

Cyrus Aghamolla, Vivian Fang, Renhui Fu

Series number :

Serial Number: 
862/2022

Date posted :

December 13 2022

Last revised :

December 13 2022
SSRN Share

Keywords

  • myopia • 
  • Signaling • 
  • investment • 
  • Mutual Fund Trading Scandals of 2003

This paper exploits the 2003 mutual fund trading scandal to investigate firms’ seemingly myopic investment behavior following negative stock price shocks. Firms affected by the scandal are more likely to meet or marginally beat earnings targets by cutting research and development and other investment.

This behavior is greeted with a more favorable market reaction and analyst forecast revision to earnings surprise and a speedier price reversal following the scandal. These findings are predictably stronger among firms with greater information asymmetry, suggesting that cutting investment to boost earnings can be a signaling tool for temporarily underpriced firms to convey financial health.

Authors

Real name:
Cyrus Aghamolla
Real name:
Renhui Fu