Social Factors of Financial Markets

Anmol Sethy, PhD

Abstract :

Trust Based Origins of Disagreement in Financial Markets: Disagreement affects asset prices and several asset specific sources of disagreement have been identified. Still relatively little is known about the potential exogenous sources. This article presents evidence that one such exogenous source is societal trust. Trust leads to two kinds of behaviour - reliance on others and disclosure to others. These two behaviours can impact disagreement in diverse ways. We show that higher trust increases reliance, which leads to lower earnings disagreement. On the contrary, higher trust also increases disclosure which leads to higher target price disagreement. Additionally, trust enhances risk taking which is also positively associated with target price disagreement. In addition, context in trust also matters. Trust in corporates reduces both forms of disagreement. Trust in press however decreases disagreement in earnings estimate while increasing disagreement in target price. Hence, trust effects disagreement in a highly nuanced manner depending on the form of disagreement and context of trust.

Tobin’s Q, Investment Decisions and Corporate Social Responsibility: A Reappraisal. Does Corporate Social Responsibility (CSR) matter for Corporate decisions? This study finds that CSR has an important bearing on firm’s Tobin’s’ Q and investment decisions. However, using a new measure of Tobin’s Q, different categories of CSR are shown to work differently. Firstly, for CSR which targets external stakeholders like environment and communities (where firm’s operations may be based), investors only value lack of concerns but not strength. This is not the case with CSR targeting internal stakeholders (employees). For this category, strength increases Tobin’s’ Q. Secondly, strength in any CSR category, whether external or internal, increases firm’s investments. Thirdly, firms with CSR concerns tend to prioritise physical capex over intangibles. For firms with strength, results are mixed as it seems they pay equal importance to both intangible and physical capex. Finally, my analysis also indicates significant changes in how environmental CSR is being valued by the capital markets.

Publication date of the thesis

Thesis committee

Supervisor: Abraham Lioui, EDHEC Business School

External reviewer: Harrison Hong (Columbia)

Other committee member: Raman Uppal, EDHEC Business School