The availability heuristic and other psychological aspects of investors’ reactions to company-specific events

Stock price reactions to company-specific events are supposed to reflect the effect of the events on the companies’ expected future financial performance. Yet, it is difficult to estimate the effect an event may exert on a given company and, along with rational considerations, investors’ reactions to company-specific events may also be affected by various psychological factors. In this chapter, we sketch the picture emerging from three studies of ours dealing with psychological aspects of investors’ reactions to analyst recommendation revisions. These studies demonstrate that stock price reactions to recommendation revisions may depend on a number of factors, such as: (i) contemporaneous stock market index returns; (ii) contemporaneous changes in the value of VIX index; and (iii) daylight duration.We attribute the findings to the effects of the availability heuristic and mood on investors’ behavior.