The Availability Heuristic and Investors’ Reaction to Ad Hoc Disclosures in the German Capital Market

• In Event: Financial Accounting and Reporting 7

Abstract

This paper analyzes the effect of the availability heuristic on investors’ reaction to ad hoc disclosures. The German Securities Trading Act imposes a statutory requirement on domestic issuers of financial instruments to notify the market of inside information. The overall conclusion of the literature is that ad hoc disclosures contain information that has a significant effect on the market price. Prior research has not analyzed how user-based characteristics influence the effect of ad hoc disclosures on market prices. Using event study methodology, this study found that abnormal returns on days when positive ad hoc disclosures are published are higher if positive investment outcomes are more available to investors, as reflected by positive contemporaneous market returns. It was also found that the abnormal trading volume following positive ad hoc disclosures is significantly higher when positive investment outcomes are more available. The abnormal stock price reactions are significantly higher when negative ad hoc disclosures are published than those after positive disclosures suggesting a negativity bias. These findings indicate that not only the content of the information disclosed is important but also the timing of the disclosure. This investigation is unique in that it demonstrates that the availability heuristic, as one user-based characteristic, has an effect on market reactions after the publication of ad hoc disclosures.

Author

• Christian Pietsch, University of Luxembourg