The Journal of Finance

FELLOW OF THE AMERICAN FINANCE ASSOCIATION FOR 2009

Published: 09/28/2009   |   DOI: 10.1111/j.1540-6261.2009.01521_2.x

Richard H. Thaler

How Much Is Investor Autonomy Worth?

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00472

Shlomo Benartzi, Richard H. Thaler

There is a worldwide trend towards defined contribution savings plans, where investors are often able to select their own portfolios. How much is this freedom of choice worth? We present retirement investors with information about the distribution of outcomes they could expect to obtain from the portfolios they picked for themselves, and the same information for the median portfolio selected by their peers. A majority of our survey participants actually prefer the median portfolio to the one they picked for themselves. We investigate various explanations for these findings and offer some evidence that the results are partly attributable to the fact that investors do not have well‐defined preferences.

Do Changes in Dividends Signal the Future or the Past?

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb02723.x

SHLOMO BENARTZI, RONI MICHAELY, RICHARD THALER

Many dividend theories imply that changes in dividends have information content about the future earnings of the firm. We investigate this implication and find only limited support for it. Firms that increase dividends in year 0 have experienced significant earnings increases in years −1 and 0, but show no subsequent unexpected earnings growth. Also, the size of the dividend increase does not predict future earnings. Firms that cut dividends in year 0 have experienced a reduction in earnings in year 0 and in year −1, but these firms go on to show significant increases in earnings in year 1. However, consistent with Lintner's model on dividend policy, firms that increase dividends are less likely than nonchanging firms to experience a drop in future earnings. Thus, their increase in concurrent earnings can be said to be somewhat “permanent.” In spite of the lack of future earnings growth, firms that increase dividends have significant (though modest) positive excess returns for the following three years.

Does the Stock Market Overreact?

Published: 07/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb05004.x

WERNER F. M. BONDT, RICHARD THALER

Research in experimental psychology suggests that, in violation of Bayes' rule, most people tend to “overreact” to unexpected and dramatic news events. This study of market efficiency investigates whether such behavior affects stock prices. The empirical evidence, based on CRSP monthly return data, is consistent with the overreaction hypothesis. Substantial weak form market inefficiencies are discovered. The results also shed new light on the January returns earned by prior “winners” and “losers.” Portfolios of losers experience exceptionally large January returns as late as five years after portfolio formation.

Caveat Compounder: A Warning about Using the Daily CRSP Equal‐Weighted Index to Compute Long‐Run Excess Returns

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.165353

Linda Canina, Roni Michaely, Richard Thaler, Kent Womack

This paper issues a warning that compounding daily returns of the Center for Research in Security Prices (CRSP) equal‐weighted index can lead to surprisingly large biases. The differences between the monthly returns compounded from the daily tapes and the monthly CRSP equal‐weighted indices is almost 0.43 percent per month, or 6 percent per year. This difference amounts to one‐third of the average monthly return, and is large enough to reverse the conclusions of a paper using the daily tape to compute the return on the benchmark portfolio. We also investigate the sources of these biases and suggest several alternative strategies to avoid them.

Further Evidence On Investor Overreaction and Stock Market Seasonality

Published: 07/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb04569.x

WERNER F. M. De BONDT, RICHARD H. THALER

In a previous paper, we found systematic price reversals for stocks that experience extreme long‐term gains or losses: Past losers significantly outperform past winners. We interpreted this finding as consistent with the behavioral hypothesis of investor overreaction. In this follow‐up paper, additional evidence is reported that supports the overreaction hypothesis and that is inconsistent with two alternative hypotheses based on firm size and differences in risk, as measured by CAPM‐betas. The seasonal pattern of returns is also examined. Excess returns in January are related to both short‐term and long‐term past performance, as well as to the previous year market return.

Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?

Published: 06/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04796.x

RONI MICHAELY, RICHARD H. THALER, KENT L. WOMACK

This article investigates market reactions to initiations and omissions of cash dividend payments. Consistent with prior literature we find that the magnitude of short‐run price reactions to omissions are greater than for initiations. In the year following the announcements, prices continue to drift in the same direction, though the drift following omissions is stronger and more robust. This post‐dividend initiation/omission price drift is distinct from and more pronounced than that following earnings surprises. A trading rule employing both samples earns positive returns in 22 out of 25 years. We find little evidence for clientele shifts in either sample.

Investor Sentiment and the Closed‐End Fund Puzzle

Published: 03/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb03746.x

CHARLES M. C. LEE, ANDREI SHLEIFER, RICHARD H. THALER

This paper examines the proposition that fluctuations in discounts of closed‐end funds are driven by changes in individual investor sentiment. The theory implies that discounts on various funds move together, that new funds get started when seasoned funds sell at a premium or a small discount, and that discounts are correlated with prices of other securities affected by the same investor sentiment. The evidence supports these predictions. In particular, we find that both closed‐end funds and small stocks tend to be held by individual investors, and that the discounts on closed‐end funds narrow when small stocks do well.

Yes, Discounts on Closed‐End Funds Are a Sentiment Index

Published: 06/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04742.x

NAVIN CHOPRA, CHARLES M. C. LEE, ANDREI SHLEIFER, RICHARD H. THALER

Summing Up

Published: 06/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04744.x

Navin Chopra, Charles M. C. Lee, Andrei Shleifer, Richard H. Thaler