Financial Literacy, Financial Markets Index, and Investors’ Biased Responses
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Date
2017-05
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The Ohio State University
Abstract
Using earnings data from Q1 2012 to Q4 2015 for 300 stocks in 15 countries, this study aims to investigate relations between financial literacy, financial markets index, and investors’ biased responses to earnings news. Financial literacy refers to an individual’s abilities and skills to manage financial problems and make informed decisions that benefit his or her personal financial well-being, including retirement, investing, and loans, etc. (Lusardi & Mitchell, 2014). Financial markets index reflects how developed a financial market is, including its depth, access, and efficiency (Svirydzenka, 2016). Stock prices’ biased responses happen when prices fail to reflect all available information. A variety of studies have been done to investigate why stock prices underreact or overreact to earnings news. There is, however, few or no study trying to link financial education and financial markets development to stock price’s biased responses. Therefore, objectives of this study are to better understand whether a higher level of financial education would ease investors’ sensitivity to news, and if a more developed financial market would lessen underreactions and overreactions of stock prices to earnings announcements. The methodology of this study is regression analysis. Major findings are that the level of financial literacy does not have a significant influence on the magnitude of earnings surprise, and that financial markets index is negatively correlated to investors’ biased responses to earnings surprise. The more developed a market is, the better market movements incorporate anticipated information.
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Keywords
Financial Literacy, Financial Markets Index, Markets Efficiency, Investors' Biased Reactions