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The House Money Effect and Break-even Effect of Corporate Operation Behaviors

Journal of Financial Studies

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Field Value
 
Title The House Money Effect and Break-even Effect of Corporate Operation Behaviors
 
Creator Yong-Chin Liu
 
Subject —
 
Description This paper examines whether corporate operation exhibit behaviors that the house-money and break-even effects in behavioral finance predict; that is, whether corporate prior operating performance systematically affects subsequent risk of company. The data on financial and stock market from 1984 to 2007 of more than 600 listed companies in Taiwan is used to empirical analysis. The findings are that whether firms’ behaviors are consistent with the both above-mentioned effects is related to their Tobin’s q levels. Firms with low Tobin’s q exhibit behavior in line with the house-money effect because the more their prior gains, the higher the subsequent asset risks, particularly holding as higher earning level. When losses in last year are small, the less the losses, the higher the asset risks in the following year, which is a loss-averting behavior and coincides with prediction from the break-even effect. When losses in last year are large, firms also exhibit loss aversion. Moreover, since asset risks of firms with low q are significantly negatively related to ROA in the same year, corporate risk-taking being influenced by prior operating performance is an irrational and biased behavior. Lastly, there is no evidence supporting these two effects for firms with high q.Key words: Behavior finance, House-money effect, Break-even effect, Loss aversion, Behavior biases
 
Publisher Journal of Financial Studies
財務金èžå­¸åˆŠ
 
Contributor —
 
Date 2011-03-03
 
Type —
 
Format application/pdf
 
Identifier http://www.jfs.org.tw/index.php/jfs/article/view/2011033
 
Source Journal of Financial Studies; Vol 18, No 3 (2010); 63
財務金èžå­¸åˆŠ; Vol 18, No 3 (2010); 63
 
Language ch